XNAS:TSBK Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012

OR

[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____.

Commission file number 0-23333

TIMBERLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
 
Washington 
 91-1863696
(State or other jurisdiction of incorporation or organization)     (IRS Employer Identification No.) 
   
624 Simpson Avenue, Hoquiam, Washington  98550 
(Address of principal executive offices)   (Zip Code) 
 
(360) 533-4747
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X     No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X_   No __
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ___  Accelerated Filer             Non-accelerated filer __  Smaller reporting company _X
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___    No   _X_

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
CLASS      SHARES OUTSTANDING AT April 30, 2012
Common stock, $.01 par value   7,045,036 
 

                                                                                                                                      


 
 

 




INDEX
 

 
  Page
PART I.              FINANCIAL INFORMATION
 
     
  Item 1.       Financial Statements (unaudited)  
     
                    Condensed Consolidated Balance Sheets 
     
                    Condensed Consolidated Statements of Income  4-5 
     
                    Condensed Consolidated Statements of Comprehensive Income
     
                    Condensed Consolidated Statements of Shareholders’ Equity 
     
                    Condensed Consolidated Statements of Cash Flows  8-9 
     
                    Notes to Unaudited Condensed Consolidated Financial Statements  10-37
     
 
Item 2.       Management’s Discussion and Analysis of Financial Condition
                   and Results of Operations
37-54 
     
  Item 3.       Quantitative and Qualitative Disclosures About Market Risk  55
     
  Item 4.       Controls and Procedures  55 
     
PART II.            OTHER INFORMATION
 
     
  Item 1.       Legal Proceedings  55 
     
  Item 1A.    Risk Factors  55 
     
  Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds  56 
     
  Item 3.       Defaults Upon Senior Securities  56 
     
  Item 4.       Mine Safety Disclosures  56 
     
  Item 5.       Other Information  56 
     
  Item 6.       Exhibits  56-57 
     
SIGNATURES
58 
Certifications
Exhibit 31.1
Exhibit 31.2
Exhibit 32

 
 
2

 
PART I.  FINANCIAL INFORMATION
Item 1.   Financial Statements
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2012 and September 30, 2011
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
   
March 31,
 
September 30,
   
2012
 
2011
Assets
       
Cash and cash equivalents:
       
     Cash and due from financial institutions
 
$  11,154
 
$  11,455
     Interest-bearing deposits in banks
 
100,467
 
100,610
     Total cash and cash equivalents
 
111,621
 
112,065
         
Certificates of deposit (“CDs”) held for investment (at cost which
     approximates fair value)
 
 
20,180
 
 
18,659
Mortgage-backed securities (“MBS”) and other investments - held to
     maturity, at amortized cost (estimated fair value $3,828 and $4,229)
 
 
3,706
 
 
4,145
MBS and other investments - available for sale
 
5,261
 
6,717
Federal Home Loan Bank of Seattle (“FHLB”) stock
 
5,705
 
5,705
         
Loans receivable
 
545,961
 
535,926
Loans held for sale
 
1,296
 
4,044
Less: Allowance for loan losses
 
(12,264)
 
(11,946)
     Net loans receivable
 
534,993
 
528,024
         
Premises and equipment, net
 
17,640
 
17,390
Other real estate owned (“OREO”) and other repossessed assets, net
 
8,024
 
10,811
Accrued interest receivable
 
2,369
 
2,411
Bank owned life insurance (“BOLI”)
 
16,228
 
15,917
Goodwill
 
5,650
 
5,650
Core deposit intangible (“CDI”)
 
323
 
397
Mortgage servicing rights (“MSRs”), net
 
2,284
 
2,108
Prepaid Federal Deposit Insurance Corporation (“FDIC”) insurance
     assessment
 
 
1,643
 
 
2,103
Other assets
 
7,082
 
6,122
     Total assets
 
$742,709
 
$738,224
         
Liabilities and shareholders’ equity
       
Liabilities:
       
Deposits: Non-interest-bearing demand
 
$  69,633
 
$  64,494
Deposits: Interest-bearing
 
534,963
 
528,184
     Total deposits
 
604,596
 
592,678
         
FHLB advances
 
45,000
 
55,000
Repurchase agreements
 
948
 
729
Other liabilities and accrued expenses
 
4,181
 
3,612
     Total liabilities
 
654,725
 
652,019
         
Shareholders’ equity
       
Preferred stock, $.01 par value; 1,000,000 shares authorized;
   16,641 shares, Series A, issued and outstanding;
   $1,000 per share liquidation value
 
 
 
16,107
 
 
 
15,989
Common stock, $.01 par value; 50,000,000 shares authorized;
   7,045,036 shares issued and outstanding
 
 
10,480
 
 
10,457
Unearned shares - Employee Stock Ownership Plan (“ESOP”)
 
(1,851)
 
(1,983)
Retained earnings
 
63,826
 
62,270
Accumulated other comprehensive loss
 
(578)
 
(528)
     Total shareholders’ equity
 
87,984
 
86,205
     Total liabilities and shareholders’ equity
 
$742,709
 
$738,224
See notes to unaudited condensed consolidated financial statements

 
3

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
     CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended March 31, 2012 and 2011
(Dollars in thousands, except per share amounts)
(Unaudited)

   
Three Months Ended March 31,
 
Six Months Ended March 31,
   
2012
2011
 
2012
2011
Interest and dividend income
           
             
     Loans receivable
 
$7,607
$8,240
 
$15,412
$16,774
     MBS and other investments
 
109
162
 
234
344
     Dividends from mutual funds
 
7
8
 
20
16
     Interest-bearing deposits in banks
 
81
83
 
170
170
     Total interest and dividend income
 
7,804
8,493
 
15,836
17,304
             
Interest expense
           
             
     Deposits
 
1,035
1,591
 
2,204
3,342
     FHLB advances
 
496
550
 
1,058
1,279
     Total interest expense
 
1,531
2,141
 
3,262
4,621
             
     Net interest income
 
6,273
6,352
 
12,574
12,683
             
Provision for loan losses
 
1,050
700
 
1,700
1,600
             
     Net interest income after provision for loan
           
     Losses
 
5,223
5,652
 
10,874
11,083
             
Non-interest income
           
             
     Other than temporary impairment (“OTTI”)
           
       on MBS and other investments
 
(94)
(9)
 
(123)
(154)
     Adjustment for portion recorded as other
           
       comprehensive loss (before taxes)
 
--
(26)
 
(30)
(17)
         Net OTTI on MBS and other investments
 
(94)
(35)
 
(153)
(171)
             
     Realized losses on MBS and other investments
 
                    --
(2)
 
--
(2)
     Gain on sales of MBS and other investments
 
20
--
 
20
79
     Service charges on deposits
 
890
898
 
1,860
1,882
     ATM transaction fees
 
540
458
 
1,057
869
     BOLI net earnings
 
154
118
 
311
240
     Gain on sales of loans, net
 
596
266
 
1,155
967
     Servicing income (expense) on loans sold
 
4
16
 
13
(20)
     Escrow fees
 
22
18
 
49
39
     Valuation recovery on MSRs
 
142
206
 
226
840
     Fee income from non-deposit investment sales
 
26
17
 
38
48
     Other
 
193
148
 
361
289
     Total non-interest income, net
 
2,493
2,108
 
4,937
5,060


See notes to unaudited condensed consolidated financial statements


 
4

 




TIMBERLAND BANCORP, INC. AND SUBSIDIARY
     CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three and six months ended March 31, 2012 and 2011
(Dollars in thousands, except per share amounts)
(Unaudited)

   
Three Months Ended March 31,
 
Six Months Ended March 31,
   
2012
2011
 
2012
2011
Non-Interest expense
           
             
     Salaries and employee benefits
 
$ 3,055
$ 3,115
 
$ 5,983
$ 6,243
     Premises and equipment
 
682
658
 
1,332
1,328
     Advertising
 
172
201
 
380
368
     OREO and other repossessed assets, net
 
434
6
 
936
434
     ATM expenses
 
197
206
 
392
380
     Postage and courier
 
139
146
 
257
261
     Amortization of CDI
 
37
42
 
74
83
     State and local taxes
 
152
160
 
301
320
     Professional fees
 
232
196
 
411
377
     FDIC insurance
 
241
332
 
466
672
     Other insurance
 
53
89
 
109
243
     Loan administration and foreclosure
 
372
267
 
533
365
     Data processing and telecommunications
 
315
281
 
615
561
     Deposit operations
 
193
140
 
416
245
     Other
 
298
339
 
589
674
     Total non-interest expense
 
6,572
6,178
 
12,794
12,554
             
Income before federal and state income taxes
 
1,144
1,582
 
3,017
3,589
             
Provision for federal and state income taxes
 
336
499
 
927
1,147
             
     Net income
 
808
1,083
 
2,090
2,442
             
Preferred stock dividends
 
(208)
(208)
 
(416)
(416)
Preferred stock discount accretion
 
(59)
(56)
 
(118)
(111)
             
Net income to common shareholders
 
$   541
$   819
 
$ 1,556
$ 1,915
             
Net income per common share
           
     Basic
 
$ 0.08
$ 0.12
 
$  0.23
$  0.28
     Diluted
 
$ 0.08
$ 0.12
 
$  0.23
$  0.28
             
Weighted average common shares outstanding
           
     Basic
 
6,780,516
6,745,250
 
6,780,516
6,745,250
     Diluted
 
6,780,516
6,745,250
 
6,780,516
6,745,250


See notes to unaudited condensed consolidated financial statements


 
5

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended March 31, 2012 and 2011
(In thousands)
(Unaudited)
 
 
   
Three Months Ended March 31,
 
Six Months Ended March 31,
   
2012
2011
 
2012
2011
Comprehensive income:
           
     Net income
 
$   808
$ 1,083
 
$ 2,090
$ 2,442
     Unrealized holding gain (loss) on securities
           
        available for sale, net of tax
 
(42)
27
 
(56)
(48)
     Change in OTTI on securities held to maturity,
        net of tax:
           
            Additions
 
(13)
(8)
 
(27)
(55)
            Additional amount recognized related to
               credit loss for which OTTI was previously
           
               recognized
 
8
13
 
(4)
9
            Amount reclassified to credit loss for
           
               previously recorded market loss
 
5
12
 
11
57
     Accretion of OTTI securities held to maturity,
           
        net of tax
 
15
13
 
26
19
             
Total comprehensive income
 
$   781
$ 1,140
 
$ 2,040
$ 2,424








See notes to unaudited condensed consolidated financial statements


 
6

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the six months ended March 31, 2012 and the year ended September 30, 2011
(Dollars in thousands)
(Unaudited)
 
 
Number of Shares
 
Amount
 
Unearned
     
Accumulated
Other
Compre-
   
 
Preferred
Stock
 
Common
Stock
 
Preferred
Stock
 
Common
Stock
 
Shares
ESOP
 
Retained Earnings
 
hensive
Loss
 
 
Total
                               
Balance, September 30, 2010
16,641
 
7,045,036
 
$15,764
 
$10,377
 
$(2,247)
 
$62,238
 
$(724)
 
$85,408
                               
Net income
--
 
--
 
--
 
--
 
--
 
1,089
 
--
 
1,089
Accretion of preferred stock discount
--
 
--
 
225
 
--
 
--
 
(225)
 
--
 
--
5% preferred stock dividend
--
 
--
 
--
 
--
 
--
 
(832)
 
--
 
(832)
Earned ESOP shares
--
 
--
 
--
 
(61)
 
264
 
--
 
--
 
203
MRDP (1) compensation expense
--
 
--
 
--
 
134
 
--
 
--
 
--
 
134
Stock option compensation expense
--
 
--
 
--
 
7
 
--
 
--
 
--
 
7
Unrealized holding gain on securities
       available for sale, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
14
 
14
Change in OTTI on securities
       held to maturity, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
139
 
139
Accretion of OTTI on securities
       held to maturity, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
43
 
43
                               
Balance, September 30, 2011
16,641
 
7,045,036
 
15,989
 
10,457
 
(1,983)
 
62,270
 
(528)
 
86,205
                               
Net income
--
 
--
 
--
 
--
 
--
 
2,090
 
--
 
2,090
Accretion of preferred stock discount
--
 
--
 
118
 
--
 
--
 
(118)
 
--
 
--
5% preferred stock dividend
--
 
--
 
--
 
--
 
--
 
(416)
 
--
 
(416)
Earned ESOP shares
--
 
--
 
--
 
(39)
 
132
 
--
 
--
 
93
MRDP  compensation expense
--
 
--
 
--
 
55
 
--
 
--
 
--
 
55
Stock option compensation expense
--
 
--
 
--
 
7
 
--
 
--
 
--
 
7
Unrealized holding loss on securities
       available for sale, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
(56)
 
(56)
Change in OTTI on securities
       held to maturity, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
(20)
 
(20)
Accretion of OTTI on securities
       held to maturity, net of tax
           
--
 
--
 
--
 
26
 
26
                               
Balance, March 31, 2012
16,641
 
7,045,036
 
$16,107
 
$10,480
 
$(1,851)
 
$63,826
 
$(578)
 
$87,984

__________________________
(1) 1998 Management Recognition and Development Plan (“MRDP”).




See notes to unaudited condensed consolidated financial statements

 
7

 

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2012 and 2011
(Dollars in thousands)
(Unaudited)
   
Six Months Ended March 31,
   
2012
2011
Cash flow from operating activities
     
Net income
 
$   2,090
$   2,442
Adjustments to reconcile net income to net cash provided by
   operating activities:
     
       Provision for loan losses
 
1,700
1,600
       Depreciation
 
460
499
       Deferred federal income taxes
 
353
128
       Amortization of CDI
 
74
83
       Earned ESOP shares
 
132
132
       MRDP compensation expense
 
55
85
       Stock option compensation expense
 
7
3
       Loss (gain) on sales of OREO and other repossessed assets, net
 
294
(555)
       Provision for OREO losses
 
372
684
       Loss on disposition of premises and equipment
 
--
3
       BOLI net earnings
 
(311)
(240)
       Gain on sales of loans, net
 
(1,155)
(967)
       Decrease in deferred loan origination fees
 
(86)
(169)
       Net OTTI on MBS and other investments
 
153
171
       Gain on sales of MBS and other investments
 
(20)
(79)
       Realized losses on held to maturity securities
 
--
2
       Valuation recovery on MSRs
 
(226)
(840)
       Loans originated for sale
 
(43,684)
(35,449)
       Proceeds from sales of loans
 
47,588
38,217
       (Decrease) increase in other assets, net
 
(774)
409
       Increase in other liabilities and accrued expenses, net
 
153
316
Net cash provided by operating activities
 
7,175
6,475
       
Cash flow from investing activities
     
Net (increase) decrease in CDs held for investment
 
(1,521)
617
Proceeds from maturities and prepayments of MBS and other
       investments available for sale
 
 
617
 
981
Proceeds from maturities and prepayments of MBS and other
       investments held to maturity
 
 
364
 
497
Proceeds from sales of MBS and other investments
 
743
2,272
Increase in loans receivable, net
 
(9,908)
(3,395)
Additions to premises and equipment
 
(710)
(225)
Proceeds from sales of OREO and other repossessed assets
 
698
1,777
Net cash (used in) provided by investing activities
 
(9,717)
2,524
       
Cash flow from financing activities
     
Increase in deposits, net
 
11,918
18,294
Repayment of FHLB advances
 
(10,000)
(20,000)
Increase (decrease) in repurchase agreements
 
219
(27)
ESOP tax effect
 
(39)
(55)
Net cash provided by (used in) financing activities
 
2,098
(1,788)



See notes to unaudited condensed consolidated financial statements

 
8

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended March 31, 2012 and 2011
(Dollars in thousands)
(Unaudited)

   
Six Months Ended March 31,
   
2012
2011
       
Net (decrease) increase in cash and cash equivalents
 
$       (444)
$      7,211
Cash and cash equivalents
     
       Beginning of period
 
112,065
111,786
       End of period
 
$  111,621
$  118,997
       
Supplemental disclosure of cash flow information
     
       Income taxes paid
 
$       918
$   1,137
       Interest paid
 
3,390
4,738
       
Supplemental disclosure of non-cash investing activities
     
       Loans transferred to OREO and other repossessed assets
 
$   1,937
$   2,065
       Loan originated to facilitate the sale of OREO
 
3,360
1,538


 

See notes to unaudited condensed consolidated financial statements

 
9

 
Timberland Bancorp, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)  Basis of Presentation:  The accompanying unaudited condensed consolidated financial statements for Timberland Bancorp, Inc. (“Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with GAAP.  However, all adjustments which are in the opinion of management, necessary for a fair presentation of the interim condensed consolidated financial statements have been included.  All such adjustments are of a normal recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011 (“2011 Form 10-K”).  The unaudited condensed consolidated results of operations for the six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2012.

(b)  Principles of Consolidation:  The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Timberland Bank (“Bank”), and the Bank’s wholly-owned subsidiary, Timberland Service Corp.   All significant inter-company balances have been eliminated in consolidation.

(c)  Operating Segment:  The Company has one reportable operating segment which is defined as community banking in western Washington under the operating name, “Timberland Bank.”

(d)  The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

(e)  Certain prior period amounts have been reclassified to conform to the March 31, 2012 presentation with no change to net income or total shareholders’ equity previously reported.


(2) REGULATORY MATTERS

In December 2009, the FDIC and the Washington State Department of Financial Institutions, Division of Banks (“Division”) determined that the Bank required supervisory attention and, on December 29, 2009, entered into an agreement on a Memorandum of Understanding with the Bank (“Bank MOU”).  Under the Bank MOU, the Bank must, among other things, maintain Tier 1 Capital of not less than 10.0% of the Bank’s adjusted total assets and maintain capital ratios above the “well capitalized” thresholds as defined under FDIC Rules and Regulations; obtain the prior consent from the FDIC and the Division prior to the Bank declaring a dividend to its holding company; and not engage in any transactions that would materially change the Bank’s balance sheet composition including growth in total assets of five percent or more or significant changes in funding sources without the prior non-objection of the FDIC.

In addition, on February 1, 2010, the Federal Reserve Bank of San Francisco (“FRB”) determined that the Company required additional supervisory attention and entered into a Memorandum of Understanding with the Company (“Company MOU”).  Under the Company MOU, the Company must, among other things, obtain
 
 
 
 
 
10

 
 
prior written approval or non-objection from the FRB to declare or pay any dividends, or make any other capital distributions; issue any trust preferred securities; or purchase or redeem any of its stock. The FRB has denied the Company’s requests to pay dividends on its Series A Preferred Stock issued under the U.S. Treasury Department’s Capital Purchase Program (“CPP”) for quarterly payments due for the last eight quarters commencing with the payments due May 15, 2010.  For additional information on the CPP, see Note 3 below entitled “U.S Treasury Department’s Capital Purchase Program.”


(3) U.S. TREASURY DEPARTMENT’S CAPITAL PURCHASE PROGRAM

On December 23, 2008, the Company received $16.64 million from the U.S. Treasury Department (“Treasury”) as a part of the Treasury’s CPP.  The CPP was established as part of the Troubled Asset Relief Program (“TARP”).  The Company sold 16,641 shares of senior preferred stock with a related warrant to purchase 370,899 shares of the Company’s common stock at a price of $6.73 per share at any time through December 23, 2018.  The preferred stock pays a 5.0% dividend for the first five years, after which the rate increases to 9.0% if the preferred shares are not redeemed by the Company.

Preferred stock is initially recorded at the amount of proceeds received.  Any discount from the liquidation value is accreted to the expected call date and charged to retained earnings.  This accretion is recorded using the level-yield method.  Preferred dividends paid (or accrued) and any accretion is deducted from net income for computing net income to common shareholders and net income per share computations.

Under the Company MOU, the Company must, among other things, obtain prior written approval or non-objection from the FRB to declare or pay any dividends.  The FRB has denied the Company’s requests to pay dividends on its Series A Preferred Stock issued under the CPP for quarterly payments due for the last eight quarters commencing with the payment due May 15, 2010.  There can be no assurances that the FRB will approve such payments or dividends in the future.   The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all cumulative preferred dividends that are due.  Since dividends on the Series A Preferred Stock have not been paid for at least six quarters, the Treasury has the right to appoint two members to the Company’s Board of Directors.





 
11

 

(4) MBS AND OTHER INVESTMENTS

MBS and other investments have been classified according to management’s intent and are as follows as of March 31, 2012 and September 30, 2011 (dollars in thousands):

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
March 31, 2012
                       
Held to Maturity
                       
    MBS:
                       
          U.S. government agencies
  $ 1,690     $ 34     $ (8 )   $ 1,716  
          Private label residential
    1,989       200       (106 )     2,083  
    U.S. agency securities
    27       2       --       29  
      Total
  $ 3,706     $ 236     $ (114 )   $ 3,828  
                                 
Available for Sale
                               
    MBS:
                               
          U.S. government agencies
  $ 3,165     $ 116     $ --     $ 3,281  
          Private label residential
    1,086       60       (159 )     987  
    Mutual funds
    1,000       --       (7 )     993  
       Total
  $ 5,251     $ 176     $ (166 )   $ 5,261  
                                 
September 30, 2011
                               
Held to Maturity
                               
    MBS:
                               
          U.S. government agencies
  $ 1,831     $ 45     $ (4 )   $ 1,872  
          Private label residential
    2,287       311       (271 )     2,327  
    U.S. agency securities
    27       3       --       30  
      Total
  $ 4,145     $ 359     $ (275 )   $ 4,229  
                                 
Available for Sale
                               
    MBS:
                               
          U.S. government agencies
  $ 4,395     $ 188     $ --     $ 4,583  
          Private label residential
    1,227       59       (152 )     1,134  
    Mutual funds
    1,000       --       --       1,000  
       Total
  $ 6,622     $ 247     $ (152 )   $ 6,717  






 
12

 


The estimated fair value of temporarily impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of March 31, 2012 are as follows (dollars in thousands):

   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Gross
Unrealized
Losses
 
Held to Maturity
   MBS:
                                   
       U.S. government agencies
  $ 119     $ (2 )   $ 338     $ (6 )   $ 457     $ (8 )
       Private label residential
    68       (3 )     729       (103 )     797       (106 )
     Total
  $ 187     $ (5 )   $ 1,067     $ (109 )   $ 1,254     $ (114 )
                                                 
Available for Sale
 
                                               
   MBS:
                                               
       U.S. government agencies
  $ - -     $ - -     $ - -     $ - -     $ - -     $ - -  
       Private label residential
    - -       - -       669       (159 )     669       (159 )
   Mutual funds
    - -       - -       993       (7 )     993       (7 )
     Total
  $ - -     $ - -     $ 1,662     $ (166 )   $ 1,662     $ (166 )
                                                 


During the three months ended March 31, 2012 and 2011, the Company recorded net OTTI charges through earnings on residential MBS of $94,000 and $35,000, respectively. During the six months ended March 31, 2012 and 2011, the Company recorded net OTTI charges through earnings on residential MBS of $153,000 and $171,000, respectively.  The Company provides for the bifurcation of OTTI into (i) amounts related to credit losses which are recognized through earnings, and (ii) amounts related to all other factors which are recognized as a component of other comprehensive income (loss).

To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of each OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield.  The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports.  Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.  The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on OTTI securities as of March 31, 2012 and September 30, 2011:

   
Range
   
Weighted
 
   
Minimum
   
Maximum
 
     Average
 
At March 31, 2012
                 
Constant prepayment rate
    6.00 %     15.00 %     9.05 %
Collateral default rate
    0.01 %     26.53 %     10.38 %
Loss severity rate
    0.23 %     79.24 %     52.30 %
                         
At September 30, 2011
                       
Constant prepayment rate
    6.00 %     15.00 %     10.71 %
Collateral default rate
    0.43 %     24.23 %     8.03 %
Loss severity rate
    11.93 %     64.54 %     39.22 %


 
13

 


The following tables present the OTTI for the three and six months ended March 31, 2012 and 2011 (dollars in thousands):

 
Three Months Ended
March 31, 2012
   
Three Months Ended
March 31, 2011
 
Held To
Maturity
 
Available
For Sale
   
Held To
Maturity
 
Available
For Sale
Total OTTI
$    88
 
$    6
   
$      8
 
$   1
Portion of OTTI recognized in other
   comprehensive (income) loss (before income taxes) (1)
--
 
--
   
26
 
--
Net OTTI recognized in earnings (2)
$    88
 
$    6
   
$    34
 
$   1
                 
 
Six Months Ended
March 31, 2012
   
Six Months Ended
March 31, 2011
 
Held To
Maturity
 
Available
For Sale
   
Held To
Maturity
 
Available
For Sale
Total OTTI
$  140
 
$  43
   
$  153
 
$   1
Portion of OTTI recognized in other
   comprehensive (income) loss (before income
   taxes) (1)
(30)
 
--
   
17
 
--
Net OTTI recognized in earnings (2)
$  110
 
$  43
   
$  170
 
$   1
________________________
(1)  
Represents OTTI related to all other factors.
(2)  
Represents OTTI related to credit losses.

The following table presents a roll-forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings and the remaining impairment loss related to all other factors recognized in other comprehensive income for the six months ended March 31, 2012 and 2011 (in thousands):

   
Six Months Ended March 31,
 
   
2012
   
2011
 
Beginning balance of credit loss
  $ 3,361     $ 4,725  
Additions:
               
       Credit losses for which OTTI was
          not previously recognized
    66       47  
       Additional increases to the amount
          related to credit loss for which OTTI
          was previously recognized
    87       124  
Subtractions:
               
       Realized losses previously recorded
          as credit losses
    (419 )     (881 )
Ending balance of credit loss
  $ 3,095     $ 4,015  

There was a gross realized gain on sale of securities for both the three and six months ended March 31, 2012 of $20,000. There were no gross realized gains on sale of MBS and other investments for the three months ended March 31, 2011. There was a gross realized gain on sale of MBS and other investments for the six months ended March 31, 2011 of $79,000. During the three months ended March 31, 2012, the Company recorded a $223,000 realized loss (as a result of the securities being deemed worthless) on 18 held to maturity residential MBS and one available for sale residential MBS, of which the entire amount had been recognized previously as a credit loss.  During the six months ended March 31, 2012, the Company recorded a $419,000 realized loss (as
 
 
 
14

 
a result of the securities being deemed worthless) on 20 held to maturity residential MBS and one available for sale residential MBS, of which the entire amount had been recognized previously as a credit loss. During the three months ended March 31, 2011, the Company recorded a $386,000 realized loss (as a result of the securities being deemed worthless) on 17 held to maturity residential MBS of which $384,000 had previously been recognized as a credit loss. During the six months ended March 31, 2011, the Company recorded a $883,000 realized loss on 18 held to maturity residential MBS and one available for sale residential MBS of which $881,000 had previously been recognized as a credit loss.

The amortized cost of residential mortgage-backed and agency securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral, retail repurchase agreements and other non-profit organization deposits totaled $6.28 million and $7.88 million at March 31, 2012 and September 30, 2011, respectively.

The contractual maturities of debt securities at March 31, 2012 are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities as a result of the prepayment of principal or call provisions.

 
Held to Maturity
   
Available for Sale
 
Amortized
Cost
 
Estimated
Fair
Value
   
Amortized
Cost
 
Estimated
Fair
Value
Due within one year
$      14
 
$      14
   
$         --
 
$         --
Due after one year to five years
7
 
8
   
77
 
82
Due after five to ten years
35
 
37
   
--
 
- -
Due after ten years
3,650
 
3,769
   
4,174
 
4,186
       Total
$ 3,706
 
$ 3,828
   
$ 4,251
 
$ 4,268

(5) FHLB STOCK

The Company views its investment in the FHLB stock as a long-term investment.  Accordingly, when evaluating it for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: 1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and length of time a decline has persisted; 2) the impact of legislative and regulatory changes on the FHLB; and 3) the liquidity position of the FHLB.  On October 25, 2010, the FHLB announced that it had entered into a Consent Agreement with the Federal Housing Finance Agency (“FHFA”), which requires the FHLB to take certain specific actions related to its business and operations.  As of its latest regulatory filing, the FHLB reported that it had met all of its regulatory capital requirements, but remained classified as “undercapitalized” by the FHFA.  The FHLB will not pay a dividend or repurchase capital stock while it is classified as undercapitalized.  While the FHLB was classified as undercapitalized, the Company does not believe that its investment in the FHLB is impaired as of March 31, 2012.  However, this estimate could change in the near term if: 1) significant other-than-temporary losses are incurred on the FHLB’s MBS causing a significant decline in its regulatory capital status; 2) the economic losses resulting from credit deterioration on the FHLB’s MBS increases significantly; or 3) capital preservation strategies being utilized by the FHLB become ineffective.




 
15

 
(6) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable and loans held for sale consisted of the following at March 31, 2012 and September 30, 2011 (dollars in thousands):
   
March 31,
2012
   
September 30,
2011
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Mortgage loans:
                       
     One- to four-family (1)
  $ 105,570       18.8 %   $ 114,680       20.5 %
     Multi-family
    30,745       5.5       30,982       5.5  
     Commercial
    255,327       45.6       246,037       43.9  
     Construction and land development
    57,069       10.2       52,484       9.4  
     Land
    44,553       7.9       49,236       8.8  
         Total mortgage loans
    493,264       88.0       493,419       88.1  
                                 
Consumer loans:
                               
     Home equity and second mortgage
    33,979       6.1       36,008       6.4  
     Other
    6,234       1.1       8,240       1.5  
        Total consumer loans
    40,213       7.2       44,248       7.9  
                                 
Commercial business loans
    26,881       4.8       22,510       4.0  
                                 
        Total loans receivable
    560,358       100.0 %     560,177       100.0 %
                                 
Less:
                               
     Undisbursed portion of construction
             loans in process
    (11,245 )             (18,265 )        
     Deferred loan origination fees
    (1,856 )             (1,942 )        
     Allowance for loan losses
    (12,264 )             (11,946 )        
                                 
        Total loans receivable, net
  $ 534,993             $ 528,024          

_________________________
(1)    Includes loans held for sale.

Construction and Land Development Loan Portfolio Composition
The following table sets forth the composition of the Company’s construction and land development loan portfolio at March 31, 2012 and September 30, 2011 (dollars in thousands):

   
March 31,
2012
   
September 30,
2011
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Custom and owner/builder
  $ 28,109       49.3 %   $ 26,205       49.9 %
Speculative one- to four-family
    2,271       4.0       1,919       3.7  
Commercial real estate
    17,079       29.9       12,863       24.5  
Multi-family
   (including condominiums)
    8,632       15.1       9,322       17.8  
Land development
    978       1.7       2,175       4.1  
   Total construction and
      land development loans
  $ 57,069       100.0 %   $ 52,484       100.0 %



 
16

 
Allowance for Loan Losses
The following tables set forth information for the three and six months ended March 31, 2012 and March 31, 2011 regarding activity in the allowance for loan losses (dollars in thousands):

   
For the Three Months Ended March 31, 2012
 
   
Beginning
Allowance
   
Provision /
(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 785     $ 197     $ 52     $ 1     $ 931  
   Multi-family
    1,309       (21 )     --       --       1,288  
   Commercial
    3,509       228       --       --       3,737  
   Construction – custom and owner / builder
    260       7       --       --       267  
   Construction – speculative one- to four-family
    164       7       --       --       171  
   Construction – commercial
    807       54       --       --       861  
   Construction – multi-family
    390       114       --       --       504  
   Construction – land development
    96       (1 )     --       --       95  
   Land
    2,657       320       247       7       2,737  
Consumer loans:
                                       
   Home equity and second mortgage
    409       75       53       --       431  
   Other
    390       (18 )     19       --       353  
Commercial business loans
    1,196       88       395       --       889  
   Total
  $ 11,972     $ 1,050     $ 766     $ 8     $ 12,264  


   
For the Six Months Ended March 31, 2012
 
   
Beginning
Allowance
   
Provision /
(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 760     $ 289     $ 120     $ 2     $ 931  
   Multi-family
    1,076       212       --       --       1,288  
   Commercial
    4,035       210       508       --       3,737  
   Construction – custom and owner / builder
    222       45       --       --       267  
   Construction – speculative one- to four-family
    169       1       --       1       171  
   Construction – commercial
    794       67       --       --       861  
   Construction – multi-family
    354       (300 )     --       450       504  
   Construction – land development
    79       246       230       --       95  
   Land
    2,795       396       532       78       2,737  
Consumer loans:
                                       
   Home equity and second mortgage
    460       74       103       --       431  
   Other
    415       (42 )     20       --       353  
Commercial business loans
    787       502       401       1       889  
   Total
  $ 11,946     $ 1,700     $ 1,914     $ 532     $ 12,264  

 
17

 



   
For the Three Months Ended March 31, 2011
 
   
Beginning
Allowance
   
Provision /
(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 738     $ (44 )   $ 104     $ 148     $ 738  
   Multi-family
    875       131       --       10       1,016  
   Commercial
    3,431       670       23       101       4,179  
   Construction – custom and owner / builder
    365       (19 )     --       --       346  
   Construction – speculative one- to four-family
    333       (61 )     12       --       260  
   Construction – commercial
    457       (278 )     --       --       179  
   Construction – multi-family
    227       36       --       --       263  
   Construction – land development
    71       440       483       --       28  
   Land
    3,526       (14 )     282       24       3,254  
Consumer loans:
                                       
   Home equity and second mortgage
    846       (312 )     36       7       505  
   Other
    441       (4 )     2       1       436  
Commercial business loans
    439       155       --       --       594  
   Total
  $ 11,749     $ 700     $ 942     $ 291     $ 11,798  


   
For the Six Months Ended March 31, 2011
 
   
Beginning
Allowance
   
Provision /
(Credit)
   
Charge-offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 530     $ 293     $ 233     $ 148     $ 738  
   Multi-family
    393       604       --       19       1,016  
   Commercial
    3,173       952       47       101       4,179  
   Construction – custom and owner / builder
    481       (135 )     --       --       346  
   Construction – speculative one- to four-family
    414       (114 )     40       --       260  
   Construction – commercial
    245       (66 )     --       --       179  
   Construction – multi-family
    245       18       --       --       263  
   Construction – land development
    240       271       483       --       28  
   Land
    3,709       (81 )     413       39       3,254  
Consumer loans:
                                       
   Home equity and second mortgage
    922       (310 )     114       7       505  
   Other
    451       13       30       2       436  
Commercial business loans
    461       155       22       --       594  
   Total
  $ 11,264     $ 1,600     $ 1,382     $ 316     $ 11,798  


 



 
18

 
The following table presents information on the loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses at March 31, 2012 and September 30, 2011 (dollars in thousands):

   
Allowance for Loan Losses
   
Recorded Investment in Loans
 
   
Individually
Evaluated for
Impairment
   
Collectively
Evaluated for
Impairment
   
Total
   
Individually
Evaluated for
Impairment
   
Collectively
Evaluated for
Impairment
   
Total
 
                                     
March 31, 2012
                                   
Mortgage loans:
                                   
   One- to four-family
  $ 272     $ 659     $ 931     $ 4,437     $ 101,133     $ 105,570  
   Multi-family
    959       329       1,288       6,910       23,835       30,745  
   Commercial
    202       3,535       3,737       18,389       236,938       255,327  
   Construction – custom and owner /
      builder
    5       262       267       314       20,906       21,220  
   Construction – speculative one- to
      four-family
    24       147       171       700       1,180       1,880  
   Construction – commercial
    661       200       861       5,390       8,001       13,391  
   Construction –  multi-family
    25       479       504       370       7,985       8,355  
   Construction – land development
    --       95       95       769       209       978  
   Land
    830       1,907       2,737       10,279       34,274       44,553  
 Consumer loans:
                                               
   Home equity and second mortgage
    7       424       431       1,094       32,885       33,979  
   Other
    --       353       353       8       6,226       6,234  
 Commercial business loans
    --       889       889       44       26,837       26,881  
   Total
  $ 2,985     $ 9,279     $ 12,264     $ 48,704     $ 500,409     $ 549,113  
September 30, 2011
                                               
Mortgage loans:
                                               
   One- to four-family
  $ 45     $ 715     $ 760     $ 3,701     $ 110,979     $ 114,680  
   Multi-family
    632       444       1,076       5,482       25,500       30,982  
   Commercial
    255       3,780       4,035       19,322       226,715