Item 1. Business - -----------------
General
Timberland Bancorp, Inc. ("Company"), a Washington corporation, was organized on September 8, 1997 for the purpose of becoming the holding company for Timberland Savings Bank, SSB ("Bank") upon the Bank's conversion from a Washington-chartered mutual to a Washington-chartered stock savings bank ("Conversion"). The Conversion was completed on January 12, 1998 through the sale and issuance of 6,612,500 shares of common stock by the Company. At September 30, 1998, the Company had total assets of $265.7 million, total deposits of $170.8 million and total equity of $81.8 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary.
The Bank was established in 1915 as "Southwest Washington Savings and Loan Association." In 1935, the Bank converted from a state-chartered mutual savings and loan association to a federally chartered mutual savings and loan association, and in 1972, changed its name to "Timberland Federal Savings and Loan Association." In 1990, the Bank converted to a federally chartered mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991, the Bank converted to a Washington-chartered mutual savings bank and adopted its current name. The Bank's deposits are insured by the FDIC up to applicable legal limits under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks ("Division") and the FDIC.
The Bank is a community oriented 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 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 Bank considers Grays Harbor, Thurston, Pierce and King Counties and, to a lesser extent, adjoining Kitsap County as its primary market area. The Bank conducts operations from its main office in Hoquiam (Grays Harbor County), three branch offices in Grays Harbor County (Aberdeen, Montesano and Ocean Shores), a branch office in King County (Auburn, opened in 1994), 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 (Silverdale, opened in 1995 in Port Orchard and subsequently relocated to Silverdale in 1998) See "Item 2.
Item 2. Properties - -------------------
The Bank operates eight full-service facilities. The Bank owns all of its offices except for the Silverdale Loan Center, which is leased. The lease expires in November 2000.
The following table sets forth certain information regarding the Bank's offices at September 30, 1998, 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 $53,379 Hoquiam, Washington 98550
Branch Offices:
300 N. Boone Street 1974 3,400 23,750 Aberdeen, Washington 98520
314 Main South 1975 2,800 19,082 Montesano, Washington 98563
361 Damon Road 1977 2,100 20,088 Ocean Shores, Washington 98569
2418 Meridian East 1980 2,400 31,403 Edgewood, Washington 98371
12814 Meridian East (South Hill) 1996 4,200 7,974 Puyallup, Washington 98373
202 Auburn Way South 1994 4,200 12,106 Auburn, Washington 98002
1201 Marvin Road, N.E. 1997 4,400 3,052 Lacey, Washington 98516
Loan Center:
Silverdale Loan Center 1995 1,225 N/A 10030 Silverdale Way, Suite 106 Silverdale, Washington 98383
Data Center:
422 6th Street 1990 2,700 N/A Hoquiam, Washington 98550
The Bank also operates nine 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 Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Bank.
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, 1998.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters - -------
The information contained under the section captioned "Common Stock Information" is included in the Company's Annual Report and is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The information contained under the section captioned "Selected Consolidated Financial Information" is included in the Company's Annual Report and is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations - ---------------------
The information contained under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" is included in the Company's Annual Report and is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
The information contained under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations Market Risk and Asset and Liability Management" is included in the Company's Annual Report and is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
The information contained under the section captioned "Consolidated Financial Statements" is included in the Company's Annual Report and is incorporated herein by reference.
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 information contained under the section captioned "Proposal I -- Election of Directors" is included in the Company's Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders ("Proxy Statement") and is incorporated herein by reference.
The following table sets forth certain information with respect to the executive officers of the Company and the Bank. Each of the executive officers holds the same position with the Company and the Bank.
Executive Officers of the Company and Bank
Age at Position September --------------------------------------------------- Name 30, 1998 Company Bank - ---- -------- ------- ----
Clarence E. Hamre 64 Chairman of the Board, Chairman of the Board, President and Chief President and Chief Executive Officer Executive Officer Michael R. Sand 44 Executive Vice President Chief Financial Officer and Secretary and Executive Vice President, Secretary and Director Paul G. MacLeod 54 Treasurer Treasurer
Biographical Information
Clarence E. Hamre has served as the Bank's President and Chief Executive Officer since 1969.
Michael R. Sand has been affiliated with the Bank since 1977 and has served as the Bank's Executive Vice President since 1986.
Paul G. MacLeod is the Bank's Treasurer and has been with the Bank since 1987.
Item 11.
Item 11. Executive Compensation - --------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors" is included in the Company's Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained under the section captioned "Security Ownership of Certain Beneficial Owners and Management" is included in the Company's Proxy Statement and is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the sections captioned "Security Ownership of Certain Beneficial Owners and Management" and "Proposal I -- Election of Directors" is included in the Company's Proxy Statement and are incorporated herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors Transactions with Management" is included in the Company's Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant* 3.2 Bylaws of the Registrant* 10.1 Employee Severance Compensation Plan** 10.2 Employee Stock Ownership Plan** (13) 1998 Annual Report to Stockholders (21) Subsidiaries of the Registrant** (27) Financial Data Schedule
- -------------------- * Filed as an exhibit to the Registrant's Registration Statement on Form S-1 333-35817). ** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September 30, 1998.
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, 1998 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, 1998 - ------------------------ President, Chief Executive Clarence E. Hamre Officer and Director (Principal Executive Officer)
/s/Michael R. Sand Executive Vice President, December 24, 1998 - ------------------------ Secretary and Director Michael R. Sand (Principal Financial and Accounting Officer)
/s/Andrea M. Clinton Director December __, 1998 - ------------------------ Andrea M. Clinton
/s/Robert Backstrom Director December __, 1998 - ------------------------ Robert Backstrom
/s/Richard R. Morris Director December __, 1998 - ------------------------ Richard R. Morris
/s/Alan E. Smith Director December __, 1998 - ------------------------ Alan E. Smith
/s/Peter J. Majar Director December 24, 1998 - ------------------------ Peter J. Majar
/s/Jon C. Parker Director December 24, 1998 - ------------------------ Jon C. Parker
/s/James C. Mason Director December 24, 1998 - ------------------------ James C. Mason
Exhibit 13
Timberland Bancorp, Inc.
========================= ANNUAL REPORT =========================
TIMBERLAND BANCORP, INC
1998 ANNUAL REPORT
Letter to Shareholders................................................ 1 Business of the Corporation........................................... 2 Common Stock Information.............................................. 2 Selected Consolidated Financial Information........................... 3 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................ 5 Independent Auditors' Report.......................................... 16 Consolidated Financial Statements..................................... 17 Notes to Consolidated Financial Statements............................ 22 Directors and Officers................................................ 44 Corporate Information................................................. 45
Timberland Bancorp, Inc.
To the Shareholders of Timberland Bancorp, Inc.
It is my pleasure to report to you the progress of Timberland Bancorp, Inc. for the 12 months ended September 30, 1998. Timberland Savings Bank converted to a Stock Company on January 12, 1998. The conversion raised $65.0 million in new capital for the Company and its subsidiary Timberland Savings Bank. A total of 6,612,500 shares of common stock were sold at a price of $10.00 per share, and trading on the Nasdaq Stock Market began January 13, 1998.
With the additional capital, Timberland is embarking on an aggressive campaign to expand its boundaries of service. Three new branch offices are expected to be added during 1999, all within the southwest part of the State. Incidentally, when our bank was chartered in 1915 it was named "Southwest Washington Savings & Loan." Today, our business plan calls for continuing service in this area, while also expanding into other Clarence E. Hamre regions.
Picture of Clarence E. Hamre
Timberland is truly committed to serving small communities from Auburn to Ocean Shores. We specialize in construction lending and home loans of all sizes and types.
Recently, we added a Business Banking Division staffed by three experienced commercial bankers. This division will service Timberland's many existing commercial accounts while acquainting other businesses in our area with the services we provide.
With our infusion of capital, Timberland experienced a record year of lending. Loans originated totaled $126.9 million, which is a 65.4% increase over the previous year. Total assets increased to $265.7 million as of September 30, 1998, while net income increased by 53.1% to $5.1 million.
Timberland has upgraded its technology to comply with regulatory requirements for the Year 2000. We have a Y2K Steering Committee that meets to address compliance and customer concerns. We expect to be fully Y2K compliant by February 1, 1999.
We are pleased with our first nine months as a public company. At the close of our fiscal year, September 30th, our return on assets was 1.99% and our net interest margin was 5.13%.
What makes Timberland stand out over other institutions is our commitment to all members of the communities we serve. We truly value long term relationships, and our success has been the result of understanding and caring about each customer's unique situation. We feel that this is our responsibility as a community bank. Customer service is our trademark. This is confirmed by local surveys and our own customer satisfaction surveys.
We welcome your comments and suggestions as we move forward with the growth of our Company. I would like to thank our Directors, officers and staff for a healthy first year as a public company. Please feel free to join us at our first annual meeting January 25, 1999 at 1:00 p.m. at the Hoquiam Elks Lodge.
/s/ Clarence E. Hamre
Clarence E. Hamre President, Chief Executive Officer and Chairman of the Board
624 Simpson Ave., Hoquiam, WA 98550 * (360) 533-4747 * FAX (360) 533-4743
BUSINESS OF THE CORPORATION
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 ("Bank"), upon its conversion from a state-chartered mutual savings bank to a state-chartered capital stock savings bank. The conversion was completed on January 12, 1998, through the issuance of 6,612,500 shares of common stock at a price of $10.00 per share to certain former depositors of Timberland Savings Bank and other members of the general public. At September 30, 1998, the Company had total consolidated assets of $265.7 million and consolidated shareholders' equity of $81.8 million.
The Company is not engaged in any significant business activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, applies primarily to the Bank.
The Bank is a state-chartered stock savings bank, originally organized in 1915. The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC") and the Washington Department of Financial Institutions, Division of Banks ("Division"). Its deposits are insured up to the applicable legal limits by the Savings Association Insurance Fund ("SAIF") of the FDIC. The Bank is also a member of the Federal Home Loan Bank ("FHLB") System.
The Bank operates as a community-oriented savings bank, which offers a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage loans. Lending activities are 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. A business banking division was established in July 1998 to increase the Bank's portfolio of commercial business loans. The Bank actively originates adjustable rate mortgages ("ARMs") that do not qualify for sale in the secondary market under Federal Home Loan Mortgage Corporation ("FHLMC") guidelines.
COMMON STOCK INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the symbol "TSBK". As of September 30, 1998, there were 6,281,875 shares of common stock outstanding and approximately 1,124 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers. Dividend payments by the Company are dependent primarily on dividends received by the Company from the Bank. Under federal regulations, the dollar amount of dividends the Bank may pay is dependent upon its capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the FDIC regulations. However, institutions that have converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the mutual to stock conversion.
The following table sets forth the market price range of the Company's common stock for the year ended September 30, 1998. This information was provided by the Nasdaq Stock Market.
High Low Dividends Fiscal 1998 ---- --- --------- - ----------- First Quarter N/A N/A N/A Second Quarter $18.75 $14.50 N/A Third Quarter $18.50 $15.50 $0.06 Fourth Quarter $16.75 $10.75 $0.06
Fiscal 1997 - ----------- There were no shares issued or outstanding during the fiscal year ended September 30, 1997 since the conversion to stock form was not completed until January 12, 1998.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company at and for the dates indicated. Since the Company had not commenced operations prior to the Bank's mutual-to-stock conversion in January 1998, the financial information presented for the periods prior to 1998 is that of the Bank only. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiary presented herein.
At September 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) SELECTED FINANCIAL CONDITION DATA:
Total assets............... $ 265,709 $ 211,553 $ 194,357 $ 177,761 $ 151,044 Loans receivable and loans held for sale, net........ 199,221 187,027 "76,495 156,523 121,558 Investment securities held- to-maturity............... -- -- -- 3,504 8,597 Investment securities available-for-sale........ 17,860 1,587 1,572 1,449 1,330 Mortgage-backed securities held-to-maturity.......... -- 3,990 4,951 6,352 7,402 Mortgage-backed securities available-for-sale........ 17,555 -- -- -- -- Cash and due from financial institutions.............. 21,784 11,446 5,055 4,860 7,360 Deposits................... 170,834 173,003 156,549 143,084 128,669 FHLB advances.............. 11,618 12,241 14,354 14,958 5,753 Shareholders' equity....... 81,780 24,645 21,329 18,653 15,638
At September 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share data) SELECTED OPERATING DATA:
Interest and dividend income.................... $ 20,650 $ 17,947 $ 16,500 $ 14,454 $ 11,307 Interest expense........... 8,144 8,386 7,629 6,360 4,715 --------- --------- --------- --------- --------- Net interest income........ 12,506 9,561 8,871 8,094 6,592 Provision for loan losses.. 200 597 70 -- -- Net interest income after --------- --------- --------- --------- --------- provision for loan losses. 12,306 8,964 8,801 8,094 6,592 Noninterest income......... 1,540 1,235 688 598 818 Noninterest expense........ 6,340 5,040 5,392 4,089 3,613 Income before income taxes. 7,506 5,159 4,097 4,603 3,797 Provision for income taxes. 2,410 1,830 1,419 1,603 1,163 --------- --------- --------- --------- --------- Net income................. $ 5,096 $ 3,329 $ 2,678 $ 3,000 $ 2,634 --------- --------- --------- --------- --------- Basic earnings per common share..................... $ 0.84 N/A N/A N/A N/A
At September 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- OTHER DATA:
Number of Real estate loans outstanding............. 2,708 2,679 2,512 2,535 2,344 Deposit accounts......... 22,014 21,668 19,994 18,681 17,552 Full-service offices..... 8 8 7 6 6
At September 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share data) KEY FINANCIAL RATIOS:
Performance Ratios: Return on average assets (1).............. 1.99 % 1.62 % 1.46 % 1.82 % 1.86 % Return on average equity (2)..................... 7.56 14.39 13.21 17.44 18.27 Interest rate spread (3). 3.87 4.18 4.34 4.56 4.32 Net interest margin (4).. 5.13 4.84 4.97 5.08 4.78 Average interest-earning assets to average interest-bearing liabilities............. 137.84 115.60 114.76 113.05 113.41 Noninterest expense as a percent of average total assets.................. 2.47 2.46 2.93 2.49 2.55 Efficiency ratio (5)..... 45.13 46.68 56.82 47.04 48.76 Book value per share..... N/A N/A N/A N/A N/A
Asset Quality Ratios: Nonaccrual and 90 days or more past due loans as a percent of loans receivable, net (6)................. 2.39 4.06 0.86 0.66 0.45 Nonperforming assets as a percent of total assets. 2.46 3.83 0.85 0.70 0.63 Allowance for loan losses as a percent of total loans receivable, net... 0.86 0.91 0.64 0.71 0.92 Allowance for losses as a percent of nonperforming loans................... 36.00 22.39 74.54 107.91 204.95 Net charge-offs to average outstanding loans....... -- 0.01 -- -- 0.02
Capital Ratios: Total equity-to-assets ratio................... 30.78 11.65 10.97 10.49 10.35 Average equity to average assets (7).............. 26.27 11.28 11.02 10.45 10.16
- ---------------------- (1) Net income divided by average total assets. (2) Net income divided by average total equity. (3) Difference between weighted average yield on interest-earning assets and weighted average interest-bearing liabilities. (4) Net interest income (before provision for loan losses) as a percentage of average interest-earning assets. (5) Other expenses (excluding federal income tax expense) divided by the sum of net interest income and noninterest income. (6) Loans receivable includes loans held for sale and is not net of allowance for loan losses. (7) Average total equity divided by average total assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General - -------
Management's discussion and analysis of the financial condition and results of operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto.
Operating Strategy - ------------------
The Bank is a community-oriented bank which has traditionally offered a wide variety of savings products to its retail customers while concentrating its lending activities on real estate loans. The primary elements of the Bank's operating strategy include:
- - Emphasize Residential Mortgage Lending and Residential Construction Lending. The Bank has attempted to establish itself as a niche lender in its primary market areas by focusing its lending activities primarily on the origination of loans secured by one- to- four family residential dwellings, including an emphasis on loans for the construction of residential dwellings. In an effort to meet the credit needs of borrowers in its primary area, the Bank actively originates one- to- four family mortgage loans that do not qualify for sale in the secondary market under FHLMC guidelines. The Bank also originates loans secured by multi-family and commercial real estate properties and, to a lesser extent, originates consumer loans. The Bank has also been an active participant in the secondary market, originating residential loans for sale to the FHLMC on a servicing retained basis. The Bank also established a business banking division in July 1998 to increase the Bank's origination of commercial business loans.
- - Diversify Primary Market Area by Expanding Branch Office Network. In an effort to lessen its dependence on the Grays Harbor County market whose economy has historically been tied to the timber and fishing industries, the Bank has opened branch offices in Pierce, King and Thurston Counties and a loan production office in Kitsap County. Thurston, Pierce, King and Kitsap Counties contain the Olympia and Seattle-Tacoma metropolitan areas and their economies are more diversified with the presence of state government, aerospace and computer industries.
- - Limit Exposure to Interest Rate Risk. In recent years, the loans that the Bank has retained in its portfolio generally have periodic interest rate adjustment features or have been relatively short-term in nature. Loans originated for portfolio primarily have included ARM loans and short-term construction loans. Longer fixed-rate mortgage loans have generally been originated for sale in the secondary market. Management believes that the interest rate sensitivity of these adjustable rate and short- term loans more closely match the interest rate sensitivity of the Bank's funding sources than do other longer duration assets with fixed interest rates. Due to the current interest rate environment, the Bank has increased its retention of fifteen and thirty year fixed-rate mortgage loans. Such loans are retained and designated as loans held for sale.
Market Risk and Asset and Liability Management - ----------------------------------------------
General Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investment, deposit and borrowing activities. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Bank's financial condition and results of operations. The Bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities or derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.
Qualitative Aspects of Market Risk The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Bank's interest-earning assets by retaining 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 Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms of up to six years.
The Bank has adopted a strategy that is designed to 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 retention or sale in the secondary market and the retention of the related loan servicing rights.
Sharp decreases in interest rates may adversely affect the Bank's earnings while increases in interest rates may beneficially affect the Bank's earnings because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period. Management has sought to sustain the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, the Bank actively originates adjustable rate loans for retention in its loan portfolio. Fixed-rate mortgage loans generally are originated for the intended purpose of resale in the secondary mortgage market. At September 30, 1998, adjustable rate loans and adjustable rate mortgage-backed securities constituted $132.7 million or 54.3%, of the Bank's total combined mortgage loan and mortgage-backed securities portfolio. Although the Bank has sought to originate ARM loans, the ability to originate such loans depends to a great extent on market interest rates and borrowers' preferences. Particularly in lower interest rate environments, borrowers often prefer to obtain fixed rate loans.
Consumer loans and construction and land development loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Bank's exposure to fluctuations in interest rates. At September 30, 1998, the construction and land development, and consumer loan portfolios amounted to $64.2 million and $12.8 million, or 27.7% and 5.5% of total loans receivable (including loans held for sale), respectively.
Quantitative Aspects of Market Risk Management of the Bank monitors the Bank's interest rate sensitivity through the use of a model provided for the Bank by the FHLB of Seattle. The model estimates the changes in NPV (net portfolio value) and net interest income in response to a range of assumed changes in market interest rates. The model first estimates the level of the Bank's NPV (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment. In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The model then recalculates the Bank's NPV under different interest rate scenarios. The change in NPV under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk. The following table is provided by the FHLB of Seattle based on data at September 30, 1998.
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 $11,165 $2,107 23.26% $55,113 ($122) (0.22)% +300 11,127 2,069 22.84 56,305 1,070 1.94 +200 10,696 1,638 18.08 56,676 1,441 2.61 +100 9,968 910 10.04 56,271 1,036 1.88 BASE 9,058 -- -- 55,235 -- -- - -100 8,100 (958) (10.58) 52,894 (2,341) (4.24) - -200 7,274 (1,785) (19.70) 50,771 (4,464) (8.08) - -300 6,502 (2,556) (28.21) 49,065 (6,170) (11.17) - -400 5,822 (3,236) (35.72) 47,938 (7,296) (13.21)
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit decay, and should not be relied upon as indicative of actual results. Furthermore, the computations do not reflect any actions management may undertake in response to changes in interest rates.
In the event of a 200 basis point decrease in interest rates, the Bank would be expected to experience an 8.1% decrease in NPV and a 19.7% decrease in net interest income. In the event of a 200 basis point increase in interest rates, a 2.6% increase in NPV and an 18.1% increase in net interest income would be expected. Based upon the modeling described above, the 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 possibly deviate significantly from those assumed in calculating the table.
Comparison of Financial Condition at September 30, 1997 and 1998 - ----------------------------------------------------------------
Total Assets: Total assets increased 25.6% from $211.6 million at September 30, 1997 to $265.7 million at September 30, 1998, primarily as a result of the January 1998 stock offering which resulted in net proceeds of $65.0 million. A portion of this increase was offset by the use of $7.9 million of net stock proceeds to purchase 529,000 shares of the Company's stock for the employee stock ownership plan ("ESOP") trust, $4.7 million used to repurchase 5.0% of the Company's shares, and approximately $8.0 million in funds withdrawn from deposit accounts to purchase stock.
Cash and Due from Financial Institutions: Cash and due from financial institutions increased by 90.3% from $11.4 million at September 30, 1997 to $21.8 million at September 30, 1998, primarily as a result of a portion of the stock offering proceeds being invested with financial institutions.
Investments and Mortgage-backed Securities: Investments and mortgage-backed securities increased by 535.0% from $5.6 million at September 30, 1997 to $35.4 million at September 30, 1998. This increase is attributable primarily to a portion of the stock offering proceeds being invested into these assets. For additional details on investments and mortgage- backed securities see Note 3 to the Notes to Consolidated Financial Statements.
Loans Receivable, and Loans Held-for-sale, net of allowance for loan losses: Loans receivable, including loans held-for-sale, net, increased by 6.5% from $187.0 million at September 30, 1997 to $199.2 million at September 30, 1998, primarily as a result of increased construction and land development loans and commercial real estate loans in the Bank's portfolio. Construction and land development loans increased $19.1 million or 42.5% between September 30, 1997 and September 30, 1998.
Real Estate Owned, net: Real estate owned, net, increased from $434,000 at September 30, 1997 to $1.7 million at September 30, 1998. This increase is primarily attributable to the Bank accepting a deed in lieu of foreclosure on two related condominium loans (with balances totaling $752,000 at September 30, 1998, a decrease from $3.0 million at March 31, 1998) in Southern King County, Washington. These two loans were classified as "substandard assets" at September 30, 1997. The remaining portion of the increased real estate owned balance is a result of the Bank foreclosing on seven one-to-four family mortgage loans and one land loan. Although no assurances can be given, the Company does not currently expect to incur a material loss on the disposition of these assets. For additional information see "Non Performing Assets".
Deposits: Deposits decreased by 1.3% from $173.0 million at September 30, 1997 to $170.8 million at September 30, 1998. This decrease is primarily attributable to depositors withdrawing approximately $8.0 million from their deposit accounts to purchase stock in the Company's stock offering, and is partially offset by growth of $5.8 million in deposits since the stock offering.
Shareholders' Equity: Total shareholders' equity increased 231.8% from $24.6 million at September 30, 1997 to $81.8 million at September 30, 1998, primarily as a result of the $65.0 million in net proceeds raised from the January 1998 stock offering and retained net income of $4.3 million, partially offset by the use of $7.9 million in net offering proceeds to purchase 529,000 shares of the Company's stock for the ESOP and $4.7 million used to repurchase 5% of the Company's shares in August 1998.
Comparison of Operating Results for the Years Ended September 30, 1997 and - -------------------------------------------------------------------------- - ----
Net Income: Net income increased 53.1% from $3.3 million for the year ended September 30, 1997 to $5.1 million for the year ended September 30, 1998. Basic earnings per share for the current year were $.84. Earnings per share for the prior comparative period are not applicable because the Company had no stock issued and outstanding at that time.
Net Interest Income: Net interest income increased 30.8% from $9.6 million for the year ended September 30, 1997 to $12.5 million for the year ended September 30, 1998 as a result of interest income increasing and interest expense decreasing.
Total interest income increased 15.1% from $17.9 million for the year ended September 30, 1997 to $20.7 million for the year ended September 30, 1998 primarily as a result of increased funds to invest from the Company's January stock offering.
Total interest expense decreased from $8.4 million for the year ended September 30, 1997 to $8.1 million for the year ended September 30, 1998, primarily as a result of a decrease in the average rate paid on interest- bearing liabilities from 4.91% for the year ended September 30, 1997 to 4.60% for the year ended September 30, 1998.
Net interest margin increased from 4.84% for the year ended September 30, 1997 to 5.13% for the year ended September 30, 1998, primarily as a result of average interest-earning assets increasing more than average interest-earning liabilities due primarily to the receipt of proceeds from the Company's stock offering.
Provision for Loan Losses: The provision for loan losses decreased from $597,000 for the year ended September 30, 1997 to $200,000 for the year ended September 30, 1998. Management decreased the provision for loan losses because it deemed the general loan loss reserves of $1.7 million at September 30, 1998 (.86% of loans receivable, net, and 36.0% of non-performing loans) adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. For additional information see "Non Performing Assets" section.
Noninterest Income: Total noninterest income increased 24.7% from $1.2 million for the year ended September 30, 1997 to $1.5 million for the year ended September 30, 1998. The largest portion of this increase was attributable to a $133,000 increase in escrow fees and a $92,000 increase in servicing income on loans sold. These increases are due to increased escrow activity and a larger volume of fixed rate loans being sold to FHLMC. Increases in miscellaneous fees account for the remaining portion of the increase.
Noninterest Expense: Total noninterest expense increased 25.8% from $5.0 million for the year ended September 30, 1997 to $6.3 million for the year ended September 30, 1998. The largest portion of this increase is a result of increased salary and employee benefit expense which increased from $2.9 million for the year ended September 30, 1997 to $3.9 million for the year ended September 30, 1998. The release of ESOP shares accounted for $364,000 of the increased compensation expense. The remaining portion of the increased compensation expense is a result of adding additional employees, cost of living increases for current employees and increased health insurance costs. The number of full-time equivalent employees increased from 86 at September 30, 1997 to 97 at September 30, 1998 as a result of restructuring the loan origination department and the loan servicing department, hiring three commercial loan officers, hiring additional personnel for the Auburn Escrow Department, elevating several part-time positions to full-time positions, and hiring an individual to assist in preparing the reports required of the Company as a public company.
Provision for Income Taxes: The provision for income taxes increased from $1.8 million for the year ended September 30, 1997 to $2.4 million for the year ended September 30, 1998 primarily as a result of higher income before income taxes.
Comparison of Financial Condition at September 30, 1996 and 1997 - ----------------------------------------------------------------
Total Assets: Total assets increased 8.9% 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: Cash and due from financial institutions increased by 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: Investments and mortgage-backed securities decreased by 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, and Loans Held-for-sale, net of allowance for loan losses: Loans receivable, including loans held-for-sale, net, increased by 6.0% from $176.5 million at September 30, 1996 to $187.0 million at September 30, 1997, primarily as a result of increases in one- to- four family mortgage loans and commercial real estate loans in the Bank's portfolio. These increases were primarily attributable the opening of the Puyallup (South Hill) branch office in October 1996 and Lacey branch in May 1997, as well as increased demand at other locations.
Premises and Equipment, net: Premises and equipment, 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 the construction of the Lacey branch office, which opened in May 1997.
Deposits: Deposits increased by 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 opening of the Puyallup (South Hill) and Lacey branch offices.
Total Capital: 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 Years Ended September 30, 1996 and 1997: - ----------------------------------------------------------------------------
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, which reduced net income for the ended September 30, 1996. 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. Earnings per share for these comparative periods are not applicable because the Company had no stock issued and outstanding at these times.
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 $168.1 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 the 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.
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.
Total 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 promotion associated with the opening of the Puyallup (South Hill) and Lacey branch offices. The Bank also increased rates on deposit accounts in response to increased competition, which also contributed to the reduction in 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. Management increased the provision due to changes in the loan portfolio mix which included a larger percentage of non-residential mortgage loans as well as an evaluation of nonperforming loans at September 30, 1997. Management deemed the allowance for loan losses adequate at September 30, 1997. For additional information see "Non Performing Assets".
Noninterest Income: Total noninterest income increased 79.5% from $688,000 for the year ended September 30, 1996 to $1.2 million 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, increased gain on sale of loans, and minor increases in other 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 equipment expense increased from $554,000 to $723,000, both as a result of the opening of the Puyallup (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 primarily as a result of higher income before income taxes.
Non Performing Assets - ---------------------
The following table sets forth information with respect to the Company's non performing assets at September 30, 1998 and September 30, 1997.
At September 30, At September 30, 1998 1997 --------------- --------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Mortgage loans: One-to-four family $ 996 $ 776 Commercial 2,919 2,886 Construction and land development -- 3,891 Land 397 -- Consumer loans 17 2 Commercial Business Loans 81 -- Total 4,410 7,555 --------- ----------- Accruing loans which are contractually past due 90 days or more: Mortgage loans: Construction and land development 396 109 --------- ----------- Total 396 109
Total of nonaccrual and 90 days past due loans $ 4,806 $ 7,664
Real estate owned and other repossessed assets 1,724 434 --------- ----------- Total nonperforming assets $ 6,530 $ 8,098
Restructured loans 236 70
Nonaccrual and 90 days or more past due loans as a percentage of loans receivable, (including loans held for sale)(1) 2.39% 4.06% Nonaccrual and 90 days or more past due loans as a percentage of total assets 1.81% 3.62% Nonperforming assets as a percentage of total assets 2.46% 3.83% Loans receivable, (including loans held for sale)(1) $ 200,949 $ 188,743 Total assets $ 265,709 $ 211,553 - --------------- (1) Loans receivable is before the allowance for loan losses.
The following is a discussion of the Bank's major problem assets at September 30, 1998:
Convenience store/retail space and mini-storage, Kitsap County, Washington. The Bank has two loans that were originated in 1996 on two separate properties: a convenience store combined with retail space and a 436 unit mini-storage facility. These two loans had a combined balance of $2.9 million at September 30, 1998. These loans became delinquent primarily because of a dispute between the two borrowers. These loans were classified as "substandard" at September 30, 1998. The Bank initiated foreclosure proceedings which were stayed due to a bankruptcy filing by the borrowers in January of 1998. The Bank's attorneys have now secured a dismissal of the bankruptcy and a receiver has been appointed to manage the properties. The Bank is currently pursuing foreclosure on the properties. Although no assurances can be given, the Bank does not expect to incur any material loss on these two loans.
Real Estate Owned: Condominiums, Southern King County, Washington. The Bank accepted a deed in lieu of foreclosure on two delinquent loans for the construction and sale of a 61-unit condominium complex. These loans were classified as "substandard" at September 30, 1997 and had a balance of $2.9 million. They were classified by the Bank as "Real Estate Owned" of $752,000 at September 30, 1998. The Bank has been actively marketing the project and, as of December 1, 1998, had accepted earnest money agreements for 29 of the 30 units. As of December 1, 1998, 26 of these sales had closed and the remaining REO balance was $484,000. The Bank does not expect to incur a material loss on the disposition of these assets based on the prices at which the units are currently selling.
Average Balances, Interest and Average Yields/Cost - --------------------------------------------------
The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios.
The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average weekly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from weekly balances. Management does not believe that the use of weekly balances instead of daily balances has caused any material difference in the information presented.
Liquidity and Capital Resources - -------------------------------
The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on and the sale of loans, maturing securities and FHLB advances. The Company also raised $65.0 million in net proceeds from the January 1998 stock offering. While the maturity and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 1998, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 25.6%. At September 30, 1998, the Bank also maintained an uncommitted credit facility with the FHLB of Seattle that provided for immediately available advances up to an aggregate amount of $49.0 million, under which $11.6 million was outstanding.
Liquidity management is both a short- and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest- bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral for repurchase agreements.
The Bank's primary investing activity is the origination of one- to- four family mortgage loans and construction and land development loans. During the years ended September 30, 1996, 1997 and 1998, the Bank originated $24.5 million, $27.1 million, and $45.4 million of one- to- four family mortgage loans and $29.7 million, $35.2 million and $58.1 million of construction and land development loans, respectively. At September 30, 1998, the Bank had mortgage loan commitments totaling $8.9 million and undisbursed loans in process totaling $28.9 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 1998 totaled $72.3 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.
Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. Under current FDIC regulations, insured state- chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%. At September 30, 1998, the Bank was in compliance with all applicable capital requirements. For additional details see the regulatory capital table in Note 15 to the Notes to Consolidated Financial Statements.
Year 2000 Issues - ----------------
The Year 2000 issue exists because many computer systems and applications use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems may recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause systems to fail or process financial and operational information incorrectly.
The Bank has established a committee to address Year 2000 issues. The committee has conducted a comprehensive review of its computer systems and equipment to identify applications that could be affected by Year 2000 issues and has implemented a plan designed to ensure that all software used in connection with the Bank's business will function correctly with dates past 1999.
The Bank has an in-house data processing department, which maintains the Bank's main system on an IBM AS400. The Bank has completed the extensive project of reprogramming all of its internal codes on this system to be Year 2000 compliant. The Bank also completed testing of the system with regulatory suggested dates in November 1998. The test results have indicated that this system is compliant in all material respects.
The Bank also uses software from third party vendors for applications such as accounts payable, fixed assets, loan processing, and wire transfers. To date, the Bank has received Year 2000 compliant software updates for all mission critical software except Fedline Two software for wire transfers and SMS Systems software for our Escrow Division. Both software companies have indicated that they will have Year 2000 compliant versions completed by December 31, 1998.
The Bank's Year 2000 committee is also in the process of addressing the credit risk within the Bank's lending activities. The Bank realizes that current and prospective commercial borrowers, like itself, must address the Year 2000 issue. Recently, the Bank sent out questionnaires to its largest commercial borrowers asking them if they were aware of the Year 2000 issues and if they were taking steps to address the issue. The Bank has received responses back from approximately half of the commercial borrowers. All responses have indicated that they are aware of the Year 2000 issue and are taking the necessary steps to prepare for it or that they have no mission critical computer systems. In addition, when underwriting a prospective commercial loan, the Bank considers what effect, if any, the Year 2000 issue may have on the business of the prospective borrower as well as the borrower's ability to meet its contractual obligations with the Bank in the event the Year 2000 issue affects the borrower's business.
The Bank's Year 2000 committee is currently developing contingency plans for other areas which may be affected by Year 2000 issues, such as the loss of electrical power for sustained periods.
The Bank has budgeted approximately $157,000 towards its Year 2000 compliance efforts, which generally would have been incurred in the normal course of business. To date, the Bank has expended approximately $109,000 towards Year 2000 compliance issues. The Bank does not believe that the ultimate costs associated with its Year 2000 compliance efforts will be material to the Bank. However, no assurances can be given that such costs will not be higher and have a material adverse effect on the Bank's financial condition and results of operations.
The above discussion contains certain forward-looking statements. The discussion is based on the Bank's current assessment and is subject to uncertainties that could cause the implementation schedule, the costs and the results contemplated by the plan to differ materially from the Bank's expectation.
Effect of Inflation and Changing Prices - ---------------------------------------
The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
PAGE
KNIGHT 1145 Broadway Plaza 253 572 7111 VALE & Suite 900 Fax 253 272 3143 GREGORY Tacoma, Washington 98402-3523 INC., P.S.
Certified Public Accountants
Independent Auditors' Report
The Board of Directors Timberland Bancorp, Inc. Hoquiam, Washington
We have audited the accompanying consolidated balance sheet of Timberland Bancorp, Inc. and Subsidiaries (formerly known as Timberland Savings Bank, SSB and Subsidiaries prior to the conversion in January 1998, as discussed in Note 1) as of September 30, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated balance sheet of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the years ended September 30, 1997 and 1996 were audited by other auditors whose report, dated November 13, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 1998, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as of September 30, 1998.
/s/ Knight, Vale & Gregory, Inc., P.S.
Tacoma, Washington October 22, 1998
Consolidated Balance Sheets - ------------------------------------------------------------------------------ (Dollars in Thousands)
Timberland Bancorp, Inc. September 30, 1998 and 1997
1998 1997
Assets Cash and due from financial institutions: Noninterest bearing deposits $ 7,039 $ 4,996 Interest bearing deposits 14,745 6,450 21,784 11,446
Investments and mortgage-backed securities: Held to maturity, at cost; fair value: 1997 - $3,982 - - 3,990 Available for sale, at fair value; cost: 1998 - $35,234; 1997 - $1,587 35,415 1,587 35,415 5,577
Loans receivable 191,007 183,171 Loans held for sale 8,214 3,856 199,221 187,027
Accrued interest receivable 1,389 1,137 Premises and equipment 5,340 5,431 Real estate owned 1,724 434 Other assets 836 501
Total assets $265,709 $211,553
Liabilities and Shareholders' Equity
Liabilities Deposits $170,834 $173,003 Federal Home Loan Bank advances 11,618 12,241 Other liabilities and accrued expenses 1,477 1,664 Total liabilities 183,929 186,908
Shareholders' Equity Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued - - - - Common stock, $0.01 par value; 50,000,000 shares authorized; 6,281,875 shares issued 63 - - Additional paid-in capital 60,183 - - Unearned shares issued to employee stock ownership trust (7,534) - - Retained earnings - substantially restricted 28,948 24,645 Net unrealized gain on securities available for sale 120 - - Total shareholders' equity 81,780 24,645
Total liabilities and shareholders' equity $265,709 $211,553
See notes to consolidated financial statements.
Consolidated Statements of Income - ------------------------------------------------------------------------------ (Dollars in Thousands, Except Per Share Amounts)
Timberland Bancorp, Inc. Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
Interest and Dividend Income Loans receivable $17,712 $17,418 $15,880 Investments and mortgage-backed securities 1,067 279 397 Dividends 189 116 126 Deposits in other financial institutions 1,682 134 97 Total interest and dividend income 20,650 17,947 16,500
Interest Expense Deposits 7,470 7,516 6,950 Federal Home Loan Bank advances 674 870 679 Total interest expense 8,144 8,386 7,629
Net interest income 12,506 9,561 8,871
Provision for Loan Losses 200 597 70
Net interest income after provision for loan losses 12,306 8,964 8,801
Non-Interest Income Service charges on deposits 317 314 278 Gain on sale of loans, net 298 339 34 Gain on sale of securities available for sale 22 - - - - Escrow and annuity fees 242 109 132 Servicing income on loans sold 252 160 - - Other 409 313 244 Total non-interest income 1,540 1,235 688
Non-Interest Expense Salaries and employee benefits 3,872 2,894 2,506 Premises and equipment 730 723 554 Deposit insurance premiums 116 76 1,203 Advertising 234 234 136 Other 1,388 1,113 993 Total non-interest expense 6,340 5,040 5,392
Income before income taxes 7,506 5,159 4,097
Provision for Income Taxes 2,410 1,830 1,419
Net income $5,096 $ 3,329 $ 2,678
Earnings Per Common Share Basic $.84 N/A N/A
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows - ------------------------------------------------------------------------------ (Dollars in Thousands)
Timberland Bancorp, Inc. Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
Cash Flows from Operating Activities Net income $ 5,096 $ 3,329 $ 2,678 Noncash revenues, expenses, gains and losses included in income: Depreciation 348 304 243 Deferred federal income taxes (33) (42) (188) Noncash compensation expense related to ESOP benefit 427 - - - - Federal Home Loan Bank stock dividends (126) (116) (107) Market value adjustment - loans held for sale (19) (70) 87 (Gain) loss on sale of real estate owned, net 25 (12) - - Gain on sale of securities available for sale (22) - - - - Loss on sale of loans 94 - - - - Provision for loan and real estate owned losses 200 598 72 Net (increase) decrease in loans originated for sale (4,433) 2,341 (690) Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses (714) (755) 1,181 Net cash provided by operating activities 843 5,577 3,276
Cash Flows from Investing Activities Purchases of securities available for sale (17,025) - - - - Purchases of securities held to maturity (20,371) - - - - Proceeds from maturities of securities held to maturity - - 948 4,905 Proceeds from maturities of securities available for sale 7,548 101 - - Proceeds from sales of securities available for sale 312 - - - - Increase in loans receivable, net (11,846) (13,400) (19,437) Additions to premises and equipment (257) (879) (1,492) Additions to real estate owned (663) (568) (99) Proceeds from sale of real estate owned 3,097 271 181 Net cash used in investing activities (39,205) (13,527) (15,942)
Cash Flows from Financing Activities Increase (decrease) in deposits (2,169) 16,454 13,465 Decrease in Federal Home Loan Bank advances (623) (2,113) (604) Proceeds from the issuance of common stock, net of related costs 64,950 - - - - Repurchase of common stock (4,735) - - - - Payment of dividends (793) - - - - Common stock purchased for ESOP (7,930) - - - - Net cash provided by financing activities 48,700 14,341 12,861
Net increase in cash 10,338 6,391 195
Cash and Due from Financial Institutions Beginning of year 11,446 5,055 4,860
End of year $21,784 $11,446 $ 5,055
(continued)
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows - ------------------------------------------------------------------------------ (concluded) (Dollars in Thousands)
Timberland Bancorp, Inc. Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
Supplemental Disclosures of Cash Flow Information Income taxes paid $3,012 $1,578 $1,545 Interest paid 8,202 8,377 7,628
Supplemental Disclosures of Non-Cash Investing Activities Transfer of securities from held to maturity to available for sale $20,375 $ - - $ - - Market value adjustment of securities held for sale, net of tax 120 (13) (1) Loans transferred to real estate owned 3,909 507 85
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Timberland Bancorp, Inc. (the Company) and its wholly owned subsidiary, Timberland Savings Bank, SSB (the Bank), and the Bank's wholly owned subsidiary, Timberland Service Corp. All significant intercompany transactions and balances have been eliminated.
Nature of Operations
The Company is a holding company which operates primarily through its subsidiary, the Bank. The Bank was established in 1915 and, through its eight branches located in Grays Harbor, Pierce, Thurston, and King Counties in Washington State, attracts deposits from the general public, and uses those funds, along with other borrowings, to provide primarily real estate loans to borrowers in western Washington, and to invest in investment securities and mortgage-backed securities.
Consolidated Financial Statement Presentation
The accounting principles followed by the Company and the methods of applying them conform with generally accepted accounting principles and with general industry practice. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the balance sheet, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ significantly from those amounts.
Certain prior year amounts have been reclassified to conform to the 1998 presentation.
Conversion
In connection with the January 1998 conversion of Timberland Savings Bank, SSB from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank, a holding company, Timberland Bancorp, Inc., was formed. The simultaneous conversion of the savings bank to stock form, the issuance of the savings bank's common stock to the holding company, and the offering and sale of the holding company's common stock to the public are referred to herein as "the conversion."
In the conversion, 6,612,500 common shares were sold at a subscription price of $10 per share, resulting in net proceeds of approximately $64,950,000 to the Company after $1,175,000 in offering expenses.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
Investments and Mortgage-Backed Securities
In accordance with Statement of Financial Accounting Standards No. 115, the Bank has classified its investments and mortgage-backed securities as follows:
Held to Maturity Debt securities for which management has the positive intent and ability to hold until maturity are reported at cost, adjusted for amortization of premiums or accretion of discounts, which are recognized in interest income over the period to maturity.
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 considered securities available for sale, and are reported at fair value. Fair value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings, and are reported as a separate component of shareholders' equity, net of the related deferred tax effect. Realized gains and losses on securities available for sale, determined using the specific identification method, are included in earnings. Amortization of premiums and accretion of discounts are recognized in interest income over the period to maturity.
Loans Receivable
Loans are stated at the amount of unpaid principal, reduced by the undisbursed portion of loans in process, unearned income and an allowance for loan losses.
Allowances for Losses
Allowances for losses on specific problem loans and real estate owned are charged to earnings when it is determined that the value of these loans and properties, in the judgment of management, is impaired. In addition to specific reserves, the Bank also maintains general provisions for loan losses based on evaluating known and inherent risks in the loan portfolio, including management's continuing analysis of the factors and trends underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The ultimate recovery of loans is susceptible to future market factors beyond the Bank's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
Allowances for Losses (concluded)
The Bank accounts for impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118. These statements address the disclosure requirements and allocation of the allowance for loan losses for certain impaired loans. A loan within the scope of these statements is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. The Bank excludes smaller balance homogenous loans, including single-family residential and consumer loans, from the scope of these statements.
When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, impairment is measured at current fair value of the collateral, reduced by estimated selling costs. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest and net unamortized deferred loan fees or costs), loan impairment is recognized by establishing or adjusting an allocation of the allowance for loan losses. SFAS No. 114, as amended, does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected. At September 30, 1998 and 1997, the Bank had no loans deemed to be impaired for which specific allocation of the allowance for loan losses was required.
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 unamortized deferred loan fees.
Premises and Equipment
Premises and equipment are recorded at cost. Depreciation is computed on the straight-line method over the following estimated useful lives: buildings - thirty to forty years; furniture and equipment - three to five years; automobile - five years. The cost of maintenance and repairs is charged to expense as incurred. Gains and losses on dispositions are reflected in earnings.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
Real Estate Owned
Real estate owned (REO) consists of properties acquired through, or in lieu of, foreclosure and is initially recorded at the fair value of the properties less estimated costs of disposal. Costs relating to development and improvement of the properties are capitalized, whereas costs relating to holding the properties are expensed.
Valuations are periodically performed by management, and an allowance for losses is established by a charge to earnings if the recorded value of a property exceeds its estimated net realizable value.
Interest on Loans and Loan Fees
Interest on loans is recorded as income when borrowers' monthly payments become due. Allowances are established for uncollected interest on loans for which the interest is determined to be uncollectible. All loans past due three or more payments are placed on nonaccrual status and internally classified as substandard. Any interest income recorded in the current reporting period is fully reserved. Subsequent collections are applied proportionately to past due principal and interest. Loans are removed from nonaccrual status only when the loan is deemed current, and the collectibility of principal and interest is no longer doubtful.
The Bank charges fees for originating loans. That portion of loan fees exceeding the estimated direct cost of originating loans is deferred and amortized to income, on the level-yield basis, over the loan term. If the loan is repaid prior to maturity, the remaining unamortized deferred loan fee is recognized in income at the time of repayment.
Loan Servicing Fees
Effective for loans originated after December 31, 1996, the Bank records its mortgage servicing rights at fair value in accordance with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which requires the Bank to allocate the total cost of all mortgage loans, whether originated or purchased, to the loans (without the mortgage servicing rights), and to mortgage servicing rights based on their relative fair values. The Bank is amortizing the mortgage servicing assets, which totaled $374,000 and $158,000 at September 30, 1998 and 1997, respectively, over the period of the estimated servicing income.
Prior to December 31, 1996, fees were reported as income when the related mortgage loan payments were collected. Loan servicing costs were charged to expense as incurred.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (continued)
Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries. Prior to fiscal year 1997, the Bank qualified under provisions of the Internal Revenue Code which permitted, as a deduction from taxable income, an allowance for bad debts based on a percentage of taxable income. The percentage method bad debt deduction available was 8% for the year ended September 30, 1996.
In 1996, the percentage-of-income bad debt deduction for federal tax purposes was eliminated. In addition, federal tax bad debt reserves which had been accumulated since October 1, 1988, that 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 Bank satisfies a mortgage origination test. As of September 30, 1998, the 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. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Employee Stock Ownership Plan
The Bank sponsors a leveraged Employee Stock Ownership Plan (ESOP). The ESOP is accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plan. Accordingly, the debt of the ESOP is recorded as other borrowed funds of the Bank and the shares pledged as collateral are reported as unearned shares issued to the employee stock ownership trust in the balance sheets. The debt of the ESOP is with the Company and is thereby eliminated in the consolidated financial statements. As shares are released from collateral, compensation expense is recorded equal to the average market price of the shares for the period, and the shares become outstanding for earnings per share calculations. Cash dividends on unallocated shares which are collateral for debt are used to reduce scheduled principal and interest payments, and are recorded as a reduction of compensation expense.
Cash Equivalents
The Company considers all amounts included in the balance sheet caption "Cash and due from financial institutions" to be cash equivalents.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 1 - Summary of Significant Accounting Policies (concluded)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which the Company adopted in the second quarter of 1998 upon formation of the holding company and issuance of stock. SFAS No. 128 requires a dual presentation of basic and diluted earnings per share. Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are not applicable because the Company has no common stock equivalents outstanding.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nos. 130, Reporting Comprehensive Income, and 131, Disclosures about Segments of an Enterprise and Related Information, both of which are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and presenting comprehensive income and its components in a full set of general-purpose financial statements. All items that are required to be recognized under accounting standards as components of comprehensive income will be reported in a financial statement that is displayed with the same prominence as other financial statements. Also, the accumulated balance of other comprehensive income will be presented separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 131 requires that public enterprises report financial and descriptive information about their reportable operating segments. Both of these pronouncements will require additional disclosures about the Company's operations, but are not anticipated to have any effect on financial position or results of operations.
Note 2 - Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for years beginning after June 15, 1999, with early adoption encouraged. The Company has adopted this standard as of September 30, 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation.
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 3 - Investments and Mortgage-Backed Securities
Investments and mortgage-backed securities have been classified according to management's intent. The recorded amounts and approximate fair values by contractual maturity are shown below (dollars in thousands). Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations, with or without prepayment penalties.
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Values
Available for Sale
September 30, 1998 U.S. agency securities $ 8,915 $ 22 $ - - $ 8,937 Mortgage-backed securities 17,457 140 (42) 17,555 Mutual Funds 7,028 93 - - 7,121 FHLB Stock 1,713 - - - - 1,713 Equity securities 121 - - (32) 89
Total $ 35,234 $255 ($74) $ 35,415
September 30, 1997 FHLB stock $ 1,587 $- - $ - - $ 1,587
Held to Maturity
September 30, 1997 Mortgage-backed securities $ 3,990 $ 44 ($52) $ 3,982
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 $1,327,000 and $1,663,000 at September 30, 1998 and 1997, respectively.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 3 - Investments and Mortgage-Backed Securities (concluded)
Effective September 30, 1998, the Company transferred securities with an amortized cost of $20,375,000 from the "held to maturity" category to the "available for sale" category under one-time reassessment guidelines allowable under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The related unrealized gain associated with this transfer was $69,000, which is included in the "unrealized gain (loss) on securities available for sale, net of tax" component of shareholders' equity.
The scheduled maturity of debt securities at September 30, 1998 follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
Available for Sale
Estimated Amortized Fair Cost Value
Due within one year $ 333 $ 326 Due from one year to five years 8,986 9,008 Due from five to ten years 1,993 2,008 Due after ten years 15,060 15,150
Total $26,372 $26,492
Note 4 - Loans Receivable and Loans Held for Sale
Loans receivable, including loans held for sale, consisted of the following at September 30 (dollars in thousands):
1998 1997
Mortgage loans: One-to four-family $ 92,707 $ 96,252 Multi-family 12,432 12,177 Commercial 32,906 29,410 Construction and land development 64,172 45,031 Land 7,749 6,937 Total mortgage loans 209,966 189,807
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 4 - Loans Receivable and Loans Held for Sale (continued)
1998 1997
Consumer loans: Home equity and second mortgage $ 8,740 $ 8,143 Other 4,066 2,824 Total consumer loans 12,806 10,967
Commercial business loans 1,105 694
Total loans receivable 223,877 201,468
Less: Undisbursed portion of loans in process 28,886 14,820 Unearned income 2,256 1,761 Allowance for loan losses 1,728 1,716 32,870 18,297
Loans receivable, net 191,007 183,171
Loans held for sale (one- to four-family) 8,214 3,875 Market value adjustment - - (19) Loans held for sale, net 8,214 3,856
Loans receivable and loans held for sale, net $ 199,221 $ 187,027
The weighted average interest rate on all loans at September 30, 1998 and 1997 was 8.62% and 8.79%, respectively.
Loans serviced for the Federal Home Loan Mortgage Corporation and others at September 30, 1998 and 1997 were $60,347,000 and $54,353,000, respectively.
A summary of the Bank's commitments outstanding at September 30 is as follows (dollars in thousands):
1998 1997
Mortgage loans $ 8,859 $6,011 Nonmortgage loans 2,397 2,922 Credit card lines 2,786 N/A
$14,042 $8,933
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 4 - Loans Receivable and Loans Held for Sale (concluded)
Certain related parties of the Bank, principally Bank directors and officers, were loan customers of the Bank in the ordinary course of business during 1998 and 1997. An analysis of the loans outstanding at September 30 to key officers and directors is as follows (dollars in thousands):
1998 1997
Balance, beginning of year $805 $845 New loans 377 18 Repayments (414) (58)
Balance, end of year $768 $805
At September 30, 1998 and 1997, the Bank had non-accruing loans totaling approximately $4,410,000 and $7,555,000, respectively. At September 30, 1998 and 1997, approximately $396,000 and $109,000, respectively, of loans were 90 days or more past due and still accruing interest. Unrecorded interest on the non-accrual loans totaled approximately $544,000 and $402,000 at September 30, 1998 and 1997, respectively. No interest income was recorded on non-accrual loans for the years ended September 30, 1998, 1997 and 1996. The average investment in non-accrual loans for the years ended September 30, 1998, 1997 and 1996 was $5,014, $4,788, and $1,159, respectively.
An analysis of the allowance for loan losses for the years ended September 30 follows (dollars in thousands):
1998 1997 1996
Balance, beginning of year $1,716 $1,133 $1,119 Provision for loan losses 200 597 70 Transfers to allowance for possible losses on REO (180) (3) (55) Loans charged off (8) (19) (1) Recoveries - - 8 - -
Balance, end of year $1,728 $1,716 $1,133
Note 5 - Premises and Equipment
Premises and equipment consisted of the following at September 30 (dollars in thousands):
1998 1997
Land $1,804 $1,804 Buildings and improvements 4,271 4,261 Furniture and equipment 1,866 1,898 Automobiles 22 22 Property held for future expansion 21 21 Construction and purchases in progress 34 6 8,018 8,012 Less accumulated depreciation 2,678 2,581
Total premises and equipment $5,340 $5,431
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 6 - Real Estate Owned
Real estate owned consisted of the following at September 30 (dollars in thousands):
1998 1997
Real estate acquired through foreclosure $1,916 $466 Allowance for possible losses (192) (32)
Total $1,724 $434
An analysis of the allowance for possible losses follows (dollars in thousands):
1998 1997 1996
Balance, beginning of year $ 32 $70 $13 Provision for additional losses - - 1 2 Transfers from allowance for loan losses 180 3 55 Write-downs (20) (42) - -
Balance, end of year $192 $32 $70
Note 7 - Accrued Interest Receivable
Accrued interest receivable consisted of the following at September 30 (dollars in thousands):
1998 1997
Loans receivable $1,718 $1,574 Less reserve for uncollected interest 573 480 1,145 1,094 Investment securities and interest bearing deposits 244 43
Total $1,389 $1,137
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 8 - Deposits
Deposits consisted of the following at September 30 (dollars in thousands):
1998 1997
Non-interest bearing $ 5,839 $ 5,164 N.O.W. checking 21,595 19,587 Passbook savings 27,315 26,269 Money market accounts 15,013 14,424 Certificates of deposit 97,561 104,758 Other 3,511 2,801
Total $170,834 $173,003
The weighted average interest rate on all deposits at September 30, 1998 and 1997 was 4.29% and 4.64%, respectively.
Deposits of $100,000 or greater totaled $18,563,000 and $22,897,000 at September 30, 1998 and 1997, respectively.
Scheduled maturities of certificates of deposit at September 30, 1998 are as follows (dollars in thousands):
Within one year $72,330 Over one to two years 19,393 Over two to five years 5,748 After five years 90
Total $97,561
Interest expense by account type is as follows for the years ended September 30 (dollars in thousands):
1998 1997 1996
Certificates of deposit $5,631 $5,807 $5,271 Money market accounts 543 514 520 Passbook savings 906 750 738 N.O.W. checking 390 445 421
Total $7,470 $7,516 $6,950
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 9 - Federal Home Loan Bank Advances
The Bank has been approved for participation in the Federal Home Loan Bank of Seattle Cash Management Advance Program, maturing July 1999, with a maximum facility of $14,664,000. 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, 1998 or 1997.
The Advances, Security and Deposit Agreement, which includes the Cash Management Advance Program, is maintained at 20% of total assets. The Bank had advances at September 30, 1998, as follows (dollars in thousands):
Interest Maturity Borrowing Rate Date Balance
Fixed rate callable 5.39% 6/03/02 $10,000 Fixed rate (monthly amortization) 6.55 2/22/06 1,230 Fixed rate (monthly amortization) 6.11 2/22/02 388
$11,618
The weighted average rate for all advances at September 30, 1998 was 5.54%.
Under the Advances, Security and Deposit Agreement, virtually all of the Bank's assets, not otherwise encumbered, are pledged as collateral for advances.
At September 30, 1998, annual repayments of FHLB advances, total $10,388,000 for the year ending September 30, 2002, and $1,230,000 for the year ending September 30, 2006.
Note 10 - Other Liabilities and Accrued Expenses
1998 1997
Federal income taxes $ 168 $ 483 Accrued pension and profit sharing 628 493 Accrued interest on deposits and FHLB advances 89 147 Accounts payable and accrued expenses - other 592 541
Total $1,477 $1,664
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 11 - Federal Income Taxes
The 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, retained earnings include approximately $2,200,000 for which no provision for federal income taxes has been made. If in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes at the current applicable rates would be imposed.
The components of the provision for income taxes at September 30 are as follows (dollars in thousands):
1998 1997 1996
Current $2,443 $1,872 $1,607 Deferred benefit (33) (42) (188)
Total $2,410 $1,830 $1,419
The components of the Company's deferred tax assets and liabilities at September 30 are as follows (dollars in thousands):
1998 1997
Deferred Tax Assets Accrued interest on loans $ 25 $ 87 Depreciation 30 27 Accrued vacation 26 24 Deferred compensation 75 60 Unearned ESOP shares 55 - - Allowance for loan losses 63 - - Loans held for sale market value adjustment - - 6 Total deferred tax assets 274 204
Deferred Tax Liabilities FHLB stock dividends 349 307 Real estate sale, installment basis 32 33 Unrealized securities gains 61 - - Other - - 4 Total deferred tax liabilities 442 344
Net deferred tax liabilities $168 $140
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 11 - Federal Income Taxes (concluded)
The provision for federal income taxes differs from that computed at the statutory corporate tax rate as follows (dollars in thousands):
1998 1997 1996 Amount Percent Amount Percent Amount Percent
Tax provision at statutory rate $2,552 34.0% $1,754 34.0% $1,393 34.0% Other - net (142) (1.9) 76 1.5 26 .6
Total tax expense $2,410 32.1% $1,830 35.5% $1,419 34.6%
Note 12 - Profit Sharing Plans
The Bank maintains a tax-qualified profit sharing plan for the benefit of all eligible employees who are at least 21 years of age and work a minimum of 501 hours. The Bank contributed $226,000, $172,000 and $178,000 to the plan for the years ended September 30, 1998, 1997 and 1996, respectively. Contributions are made on a discretionary basis.
In addition, the Bank has an employee bonus plan based on net income. Bonuses accrued for the years ended September 30, 1998, 1997 and 1996 totaled $181,000, $144,000 and $107,000, respectively.
Note 13 - Employee Stock Ownership Plan
In 1998, the Bank established an Employee Stock Ownership Plan (ESOP) that benefits all employees with at least one year of service who are 21 years of age or older. The ESOP is funded by Bank contributions in cash or stock. Employee vesting occurs over six years. The amount of the annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt.
In January 1998 the ESOP borrowed $7,930,000 from the Company to purchase 529,000 shares of common stock of the Company. The loan will be repaid primarily from the Company's contributions to the ESOP over 15 years. The interest rate on the loan is 8.5%.
Shares held by the ESOP as of September 30, 1998 were classified as follows:
Unallocated shares 502,550 Shares released for allocation 26,450
Total ESOP shares 529,000
The approximate fair market value of the Bank's unallocated shares (including those released for allocation) at September 30, 1998 is $7,633,000.
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 14 - Deferred Compensation/Noncompetition Agreement and Severance Compensation Agreement
The Bank has a deferred compensation/noncompetition arrangement with its chief executive officer which will provide monthly payments of $1,600 if retirement occurs prior to age 65 or $2,000 per month if retirement occurs at age 65. Once payments have commenced they will continue until his death, at which time payments will continue to his surviving spouse until her death or for 60 months. The present value of the payments, based on the life expectancy of the chief executive officer, is being accrued based on a retirement age of 65 and is included in other liabilities in the consolidated financial statements. As of September 30, 1998 and 1997, $221,000 and $177,000, respectively, has been accrued under the agreement.
In connection with the January 1998 conversion, the Bank adopted an Employee Severance Compensation Plan, which expires in ten years, to provide benefits to eligible employees in the event of a change in control of the Company or the Bank (as defined in the plan). In general, all employees with two or more years of service will be eligible to participate in the plan. Under the plan, in the event of a change in control of the Company or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service with the Bank. The maximum payment for any eligible employee would be equal to 24 months of their current compensation.
Note 15 - Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance- sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below) of Tier 1 capital to average assets, and minimum ratios of Tier 1 and total capital to risk- weighted assets. Under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the table.
As of September 30, 1998, the most recent notification from the Bank's regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 15 - Regulatory Matters (concluded)
The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
To be Well Capitalized Under Prompt Capital Corrective Adequacy Action Actual Purposes Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 1998 Tier 1 capital (to average assets): Consolidated $81,780 31.0% $10,541 4.0% N/A N/A Timberland Savings Bank, SSB 53,865 22.4 9,636 4.0 $12,045 5.0% Tier 1 capital (to risk-weighted assets): Consolidated 81,780 49.9 6,560 4.0 N/A N/A Timberland Savings Bank, SSB 53,865 33.4 6,453 4.0 9,680 6.0 Total capital (to risk-weighted assets): Consolidated 83,508 50.9 13,121 8.0 N/A N/A Timberland Savings Bank, SSB 55,593 33.9 12,906 8.0 16,133 10.0
September 30, 1997 Tier 1 capital (to average assets): Timberland Savings Bank, SSB $24,645 12.0% $8,205 4.0% $10,269 5.0% Tier 1 capital (to risk-weighted assets): Timberland Savings Bank, SSB 24,645 16.3 6,050 4.0 9,074 6.0 Total capital (to risk-weighted assets): Timberland Savings Bank, SSB 26,361 17.4 12,099 8.0 15,124 10.0
Restrictions on Retained Earnings
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
At the time of conversion, the Bank established a liquidation account in an mount equal to its retained earnings as of June 30, 1997, the date of the latest statement of financial condition used in the final conversion prospectus. The liquidation account will be maintained for the benefit of eligible withdrawable account holders who have maintained their deposit accounts in the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank (and only in such an event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. The Bank may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account.
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 16 - Condensed Financial Information - Parent Company Only
Condensed Balance Sheet - September 30, 1998 (Dollars in Thousands)
Assets Noninterest bearing deposits $ 3 Interest bearing deposits 6,904 Investments and mortgage-backed securities available for sale 13,222 Loan receivable from Bank 7,697 Investment in Bank 53,865 Other assets 134
Total assets $81,825
Liabilities and Shareholders' Equity Other liabilities and accrued expenses $ 45 Shareholders' equity 81,780
Total liabilities and shareholders' equity $81,825
Condensed Statement of Income - Year Ended September 30, 1998 (Dollars in Thousands)
Operating Income Interest on investment and mortgage-backed securities $ 907 Interest on loan receivable from Bank 469 Dividends 63 Gain on sale of investment securities available for sale 22 Total operating income 1,461
Operating Expenses 70
Income before income taxes and equity in undistributed income of Bank 1,391
Income Taxes 473
Income before equity in undistributed income of Bank 918
Equity in Undistributed Income of Bank 4,178
Net income $5,096
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 16 - Condensed Financial Information - Parent Company Only (concluded)
Condensed Statement of Cash Flows - Year Ended September 30, 1998 (Dollars in Thousands)
Cash Flows from Operating Activities Net income $ 5,096 Adjustments to reconcile net income to net cash provided: Equity in undistributed income of Bank (4,178) Gain on sale of securities available for sale (22) Accretion of discount on securities available for sale (3) Other, net (115) Net cash provided by operating activities 778
Cash Flows from Investing Activities Investment in Bank (32,475) Purchases of securities available for sale (17,224) Proceeds from maturities of securities available for sale 3,700 Proceeds from sale of securities available for sale 403 Funding provided to the Bank for purchase of common stock for ESOP (7,930) Principal repayments on loan receivable from the Bank 233 Net cash used in investing activities (53,293)
Cash Flows from Financing Activities Proceeds from the issuance of common stock, net of related costs 64,950 Repurchase of common stock (4,735) Payment of dividends (793) Net cash provided by financing activities 59,422
Net increase in cash 6,907
Cash and Due from Financial Institutions Beginning of year - -
End of year $ 6,907
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 17 - Earnings Per Share Disclosures
Information regarding the calculation of basic earnings per share for the year ended September 30, 1998 is as follows (dollars in thousands, except per share amount).
Weighted Average Net Income Shares Per Share (Numerator) (Denominator) Amount
Basic earnings per share: Net income $5,096 6,036,597 $.84
The weighted average number of shares outstanding has been reduced by unallocated ESOP shares for this calculation. Diluted earnings per share are not applicable because the Company has no common stock equivalents outstanding.
Note 18 - Subsequent Event
Subsequent to September 30, 1998, the Company completed a repurchase of 5% of the outstanding common stock, or 314,094 shares, at an average price of $12.19 per share.
Note 19 - Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of estimated fair values for financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. Major assumptions, methods, and fair value estimates for the Bank's significant financial instruments are set forth below:
Cash and Due from Financial Institutions The recorded amount is a reasonable estimate of fair value.
Investments, Mortgage-Backed Securities and Loans Held for Sale The fair value of investments, mortgage-backed securities and loans held for sale has been based on quoted market prices or dealer quotes.
(continued)
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 19 - Fair Values of Financial Instruments (concluded)
Loans Receivable Fair values for loans are estimated for portfolios of loans with similar financial characteristics. Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Prepayments are based on the historical experience of the Bank.
Deposits The fair value of deposits with no stated maturity date is included at the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered by the Bank for deposits of similar remaining maturities.
Federal Home Loan Bank Advances The fair value of borrowed funds is estimated by discounting the future cash flows of the borrowings at a rate which approximates the current offering rate of the borrowings with a comparable remaining life.
The estimated fair values of financial instruments at September 30, 1998 and 1997 were as follows (dollars in thousands):
1998 1997 Recorded Fair Recorded Fair Amount Value Amount Value
Financial Assets Cash and due from financial institutions $ 21,784 $ 21,784 $ 11,446 $ 11,446 Investments and mortgage backed securities 35,415 35,415 5,577 5,569 Loans receivable 199,221 200,912 187,027 191,655
Financial Liabilities Deposits $170,834 $171,129 $173,003 $173,468 Federal Home Loan Bank advances 11,618 11,945 12,241 12,176
Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. September 30, 1998 and 1997
Note 20 - Selected Quarterly Financial Data (Unaudited)
The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):
December March June September 31, 31, 30, 30, 1997 1998 1998 1998
Interest and dividend income $4,655 $5,274 $5,319 $5,402 Interest expense 2,241 2,019 1,928 1,956 Net interest income 2,414 3,255 3,391 3,446
Provision for loan losses (60) (50) (45) (45) Noninterest income 324 457 418 341 Noninterest expense (1,491) (1,532) (1,571) (1,746)
Income before income taxes 1,187 2,130 2,193 1,996
Provision for income taxes 383 716 742 569
Net income $ 804 $1,414 $1,451 $1,427
Basic earnings per share $.13 $.23 $.24 $.24
December March June September 31, 31, 30, 30, 1997 1998 1998 1998
Interest and dividend income $4,441 $4,461 $4,468 $4,577 Interest expense 2,067 2,072 2,098 2,149 Net interest income 2,374 2,389 2,370 2,428
Provision for loan losses (88) (131) (115) (263) Noninterest income 233 307 297 398 Noninterest expense (1,187) (1,222) (1,243) (1,388)
Income before income taxes 1,332 1,343 1,309 1,175
Provision for income taxes 485 502 447 396
Net income $ 847 $ 841 $ 862 $ 779
Basic earnings per share N/A N/A N/A N/A
DIRECTORS AND OFFICERS TIMBERLAND BANCORP, INC.
OFFICERS:
Clarence E. Hamre President and Chief Executive Officer
Michael R. Sand Executive Vice President
Paul G. MacLeod Treasurer
DIRECTORS:
Clarence E. Hamre Chairman of the Board, President and Chief Executive Officer of Timberland Bancorp, Inc. and Timberland Savings Bank
Michael R. Sand Secretary, Executive Vice President of Timberland Bancorp, Inc. and Timberland Savings Bank
Peter J. Majar Retired. Former general manager of Hoquiam Plywood Co., Inc.
Robert Backstrom Retired. Former owner of Price & Price Real Estate and Insurance
Richard R. Morris, Jr. Retired. Former owner of Dick's Food Centers, Inc.
Alan E. Smith Retired. Former owner of Harbor Drug, Inc, a retail pharmacy
James C. Mason President and owner of Mason Timber Co.
Andrea M. Clinton Owner of AMC Interiors
Jon C. Parker Member the law firm of Parker, Johnson & Parker P.S.
CORPORATE INFORMATION
MAIN OFFICE INDEPENDENT AUDITORS
624 Simpson Avenue Knight Vale & Gregory Inc., P.S. Hoquiam, Washington 98550 Tacoma, Washington Telephone: (360) 533-4747
GENERAL COUNSEL SPECIAL COUNSEL
Parker Johnson & Parker PS Breyer & Associates PC Hoquiam, Washington Washington, D.C.
TRANSFER AGENT
For stockholder inquiries concerning dividend checks, transferring ownership, address changes or lost or stolen certificates please contact our transfer agent:
American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, New York 10005 (800) 937-5449
ANNUAL MEETING
The Annual Meeting of Stockholder will be held at the Elks Lodge, 624 K Street, Hoquiam, Washington on Monday, January 25, 1999 at 1:00 p.m., Pacific Time.
10-K INFORMATION A COPY OF THE FORM 10-K, INCLUDING CONSOLIDATED FINANCIAL STATEMENTS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON WRITTEN REQUEST TO MICHAEL R. SAND, EXECUTIVE VICE PRESIDENT AND SECRETARY, TIMBERLAND BANCORP, INC., 624 SIMPSON AVENUE, HOQUIAM, WASHINGTON 98550.