XNAS:TSBK Timberland Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:TSBK Fair Value Estimate
Premium
XNAS:TSBK Consider Buying
Premium
XNAS:TSBK Consider Selling
Premium
XNAS:TSBK Fair Value Uncertainty
Premium
XNAS:TSBK Economic Moat
Premium
XNAS:TSBK Stewardship
Premium
 
 
 
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 June 30, 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 July 31, 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 Operations    4-5 
       
  Condensed Consolidated Statements of Comprehensive Income (Loss) 
       
  Condensed Consolidated Statements of Shareholders’ Equity   
       
  Condensed Consolidated Statements of Cash Flows   
8-9
       
  Notes to Unaudited Condensed Consolidated Financial Statements   10-32 
       
Item 2.   
Management’s Discussion and Analysis of Financial Condition 
and Results of Operations
 
33-44
 
       
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    45 
       
Item 4.    Controls and Procedures     45 
       
PART II.  OTHER INFORMATION     
       
 Item 1.   Legal Proceedings    45 
       
 Item 1A. Risk Factors    45
       
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    45
       
 Item 3.    Defaults Upon Senior Securities    45 
       
 Item 4.    Mine Safety Disclosures      45
       
 Item 5.    Other Information     46 
       
 Item 6.    Exhibits     46 
       
SIGNATURES      47 
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
June 30, 2012 and September 30, 2011
(Dollars in thousands, except per share amounts)
(Unaudited) 
   
June 30,
   
September 30,
 
   
2012
   
2011
 
Assets
           
Cash and cash equivalents:
           
     Cash and due from financial institutions
  $ 12,489     $ 11,455  
     Interest-bearing deposits in banks
    80,499       100,610  
     Total cash and cash equivalents
    92,988       112,065  
                 
Certificates of deposit (“CDs”) held for investment (at cost which
     approximates fair value)
    22,781       18,659  
Mortgage-backed securities (“MBS”) and other investments - held to
     maturity, at amortized cost (estimated fair value $3,651 and $4,229)
    3,503       4,145  
MBS and other investments - available for sale
    5,113       6,717  
Federal Home Loan Bank of Seattle (“FHLB”) stock
    5,705       5,705  
                 
Loans receivable
    544,708       535,926  
Loans held for sale
    4,064       4,044  
Less: Allowance for loan losses
    (11,603 )     (11,946 )
     Net loans receivable
    537,169       528,024  
                 
Premises and equipment, net
    17,723       17,390  
Other real estate owned (“OREO”) and other repossessed assets, net
    9,997       10,811  
Accrued interest receivable
    2,161       2,411  
Bank owned life insurance (“BOLI”)
    16,374       15,917  
Goodwill
    5,650       5,650  
Core deposit intangible (“CDI”)
    286       397  
Mortgage servicing rights (“MSRs”), net
    2,150       2,108  
Prepaid Federal Deposit Insurance Corporation (“FDIC”) insurance
     assessment
    1,415       2,103  
Other assets
    6,121       6,122  
     Total assets
  $ 729,136     $ 738,224  
                 
Liabilities and shareholders’ equity
               
Liabilities:
               
Deposits: Non-interest-bearing demand
  $ 70,004     $ 64,494  
Deposits: Interest-bearing
    520,362       528,184  
     Total deposits
    590,366       592,678  
                 
FHLB advances
    45,000       55,000  
Repurchase agreements
    826       729  
Other liabilities and accrued expenses
    3,669       3,612  
     Total liabilities
    639,861       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
      16,168         15,989  
Common stock, $.01 par value; 50,000,000 shares authorized;
   7,045,036 shares issued and outstanding
    10,500       10,457  
Unearned shares - Employee Stock Ownership Plan (“ESOP”)
    (1,785 )     (1,983 )
Retained earnings
    64,905       62,270  
Accumulated other comprehensive loss
    (513 )     (528 )
     Total shareholders’ equity
    89,275       86,205  
     Total liabilities and shareholders’ equity
  $ 729,136     $ 738,224  
See notes to unaudited condensed consolidated financial statements

 
3

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 2012 and 2011
(Dollars in thousands, except per share amounts)
(Unaudited)

   
Three Months Ended June 30,
 
Nine Months Ended June 30,
   
2012
2011
 
2012
2011
Interest and dividend income
           
             
     Loans receivable
 
$7,842
$8,192
 
$23,254
$24,966
     MBS and other investments
 
89
141
 
323
486
     Dividends from mutual funds
 
6
8
 
26
23
     Interest-bearing deposits in banks
 
82
90
 
252
260
     Total interest and dividend income
 
8,019
8,431
 
23,855
25,735
             
Interest expense
           
             
     Deposits
 
925
1,463
 
3,128
4,805
     FHLB advances
 
466
556
 
1,525
1,835
     Total interest expense
 
1,391
2,019
 
4,653
6,640
             
     Net interest income
 
6,628
6,412
 
19,202
19,095
             
Provision for loan losses
 
900
3,400
 
2,600
5,000
             
     Net interest income after provision for loan
           
         losses
 
5,728
3,012
 
16,602
14,095
             
Non-interest income
           
             
     Other than temporary impairment (“OTTI”)
           
       on MBS and other investments
 
(60)
(70)
 
(182)
(224)
     Adjustment for portion recorded as  transferred from other
           
       comprehensive income (loss) before taxes
 
23
(95)
 
(8)
(112)
         Net OTTI on MBS and other investments
 
(37)
(165)
 
(190)
(336)
             
     Realized losses on MBS and other investments
 
                    --
--
 
--
(2)
     Gain on sales of MBS and other investments
 
2
--
 
22
79
     Service charges on deposits
 
955
993
 
2,815
2,875
     ATM and debit card interchange transaction fees
 
564
515
 
1,621
1,384
     BOLI net earnings
 
146
121
 
457
361
     Gain on sales of loans, net
 
567
247
 
1,722
1,214
     Escrow fees
 
30
16
 
79
55
     Valuation recovery (allowance) on MSRs
 
(82)
(137)
 
144
703
     Fee income from non-deposit investment sales
 
20
25
 
58
73
     Other
 
176
146
 
550
414
     Total non-interest income, net
 
2,341
1,761
 
7,278
6,820




See notes to unaudited condensed consolidated financial statements

 
 
 
4

 
 
 
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For the three and nine months ended June 30, 2012 and 2011
(Dollars in thousands, except per share amounts)
(Unaudited)

   
Three Months Ended June 30,
 
Nine Months Ended June 30,
   
2012
2011
 
2012
2011
Non-interest expense
           
             
     Salaries and employee benefits
 
$ 3,006
$ 3,150
 
$ 8,989
$ 9,393
     Premises and equipment
 
647
640
 
1,979
1,967
     Advertising
 
173
235
 
553
604
     OREO and other repossessed assets, net
 
363
496
 
1,299
930
     ATM expenses
 
206
203
 
598
583
     Postage and courier
 
124
139
 
381
400
     Amortization of CDI
 
37
42
 
111
125
     State and local taxes
 
159
155
 
460
475
     Professional fees
 
217
190
 
628
567
     FDIC insurance
 
237
248
 
703
919
     Other insurance
 
51
56
 
161
299
     Loan administration and foreclosure
 
82
345
 
615
711
     Data processing and telecommunications
 
303
285
 
918
847
     Deposit operations
 
177
202
 
593
447
     Other
 
315
396
 
903
1,069
     Total non-interest expense
 
6,097
6,782
 
18,891
19,336
             
Income (loss) before federal and state income
           
   taxes
 
1,972
(2,009)
 
4,989
1,579
             
Provision (benefit) for federal and state income
           
   taxes
 
624
(729)
 
1,551
417
             
     Net income (loss)
 
1,348
(1,280)
 
3,438
1,162
             
Preferred stock dividends
 
(208)
(208)
 
(624)
(624)
Preferred stock discount accretion
 
(61)
(57)
 
(179)
(168)
             
Net income (loss) to common shareholders
 
$   1,079
$ (1,545)
 
$ 2,635
$   370
             
Net income (loss) per common share
           
     Basic
 
$ 0.16
$ (0.23)
 
$  0.39
$  0.05
     Diluted
 
$ 0.16
$ (0.23)
 
$  0.39
$  0.05
             
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
6,745,487



See notes to unaudited condensed consolidated financial statements

 
5

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended June 30, 2012 and 2011
(In thousands)
(Unaudited)
 
 
   
Three Months Ended June 30,
 
Nine Months Ended June 30,
   
2012
2011
 
2012
2011
Comprehensive income (loss):
           
     Net income (loss)
 
$  1,348
$ (1,280)
 
$ 3,438
$ 1,162
     Unrealized holding gain (loss) on securities
           
        available for sale, net of tax
 
39
50
 
(17)
2
     Change in OTTI on securities held to maturity,
        net of tax:
           
            Additions
 
--
(9)
 
(27)
(65)
            Additional amount recognized related to
               credit loss for which OTTI was previously
           
               recognized
 
5
5
 
1
15
            Amount reclassified to credit loss for
           
               previously recorded market loss
 
10
67
 
21
124
     Accretion of OTTI securities held to maturity,
           
        net of tax
 
11
8
 
37
27
             
Total comprehensive income (loss)
 
$   1,413
$ (1,159)
 
$ 3,453
$ 1,265




See notes to unaudited condensed consolidated financial statements


 
6

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the nine months ended June 30, 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
--
 
--
 
--
 
--
 
--
 
3,438
 
--
 
3,438
Accretion of preferred stock discount
--
 
--
 
179
 
--
 
--
 
(179)
 
--
 
--
5% preferred stock dividend
--
 
--
 
--
 
--
 
--
 
(624)
 
--
 
(624)
Earned ESOP shares
--
 
--
 
--
 
(53)
 
198
 
--
 
--
 
145
MRDP  compensation expense
--
 
--
 
--
 
85
 
--
 
--
 
--
 
85
Stock option compensation expense
--
 
--
 
--
 
11
 
--
 
--
 
--
 
11
Unrealized holding loss on securities
       available for sale, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
(17)
 
(17)
Change in OTTI on securities
       held to maturity, net of tax
--
 
--
 
--
 
--
 
--
 
--
 
(5)
 
(5)
Accretion of OTTI on securities
       held to maturity, net of tax
           
--
 
--
 
--
 
37
 
37
                               
Balance, June 30, 2012
16,641
 
7,045,036
 
$16,168
 
$10,500
 
$(1,785)
 
$64,905
 
$(513)
 
$89,275
__________________________
(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 nine months ended June 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
   
Nine Months Ended June 30,
   
2012
2011
Cash flows from operating activities
     
Net income
 
$   3,438
$   1,162
Adjustments to reconcile net income to net cash provided by
   operating activities:
     
       Provision for loan losses
 
2,600
5,000
       Depreciation
 
684
743
       Deferred federal income taxes
 
366
(412)
       Amortization of CDI
 
111
125
       Earned ESOP shares
 
198
198
       MRDP compensation expense
 
85
129
       Stock option compensation expense
 
11
5
       Loss (gain) on sales of OREO and other repossessed assets, net
 
290
(527)
       Provision for OREO losses
 
609
973
       Loss on disposition of premises and equipment
 
--
3
       BOLI net earnings
 
(457)
(361)
       Gain on sales of loans, net
 
(1,722)
(1,214)
       Decrease in deferred loan origination fees
 
(181)
(241)
       Net OTTI on MBS and other investments
 
190
336
       Gain on sales of MBS and other investments
 
(22)
(79)
       Realized losses on held to maturity securities
 
--
2
       Valuation recovery on MSRs
 
(144)
(703)
       Loans originated for sale
 
(67,112)
(44,266)
       Proceeds from sales of loans
 
68,814
47,684
       Increase (decrease) in other assets, net
 
622
(15)
       Increase in other liabilities and accrued expenses, net
 
433
177
Net cash provided by operating activities
 
8,813
8,719
       
Cash flows from investing activities
     
Net increase in CDs held for investment
 
(4,122)
(40)
Proceeds from maturities and prepayments of MBS and other
       investments available for sale
 
 
829
 
1,248
Proceeds from maturities and prepayments of MBS and other
       investments held to maturity
 
 
574
 
697
Proceeds from sales of MBS and other investments
 
743
2,272
Increase in loans receivable, net
 
(12,676)
(3,476)
Additions to premises and equipment
 
(1,017)
(344)
Proceeds from sales of OREO and other repossessed assets
 
1,047
2,883
Net cash (used in) provided by investing activities
 
(14,622)
3,240
       
Cash flows from financing activities
     
(Decrease) increase in deposits, net
 
(2,312)
10,629
Repayment of FHLB advances
 
(10,000)
(20,000)
Increase (decrease) in repurchase agreements
 
97
(24)
ESOP tax effect
 
(53)
(47)
Dividends paid
 
(1,000)
- -
Net cash used in financing activities
 
(13,268)
(9,442)


See notes to unaudited condensed consolidated financial statements

 
8

 


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the nine months ended June 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)

   
Nine Months Ended June 30,
   
2012
2011
       
Net (decrease) increase in cash and cash equivalents
 
$  (19,077)
$      2,517
Cash and cash equivalents
     
       Beginning of period
 
112,065
111,786
       End of period
 
$    92,988
$  114,303
       
Supplemental disclosure of cash flow information
     
       Income taxes paid
 
$   1,463
$   2,097
       Interest paid
 
4,770
6,786
       
Supplemental disclosure of non-cash investing activities
     
       Loans transferred to OREO and other repossessed assets
 
$   4,906
$   4,344
       Loans originated to facilitate the sale of OREO
 
3,744
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 nine months ended June 30, 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 June 30, 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 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 certain quarterly cash dividends on its Series A Preferred Stock issued under the U.S. Treasury Department’s Capital Purchase Program (“CPP”) since May 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,  which 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
 
 
 
 
10

 
 
 
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 (or added to) net income (loss) for computing net income (loss) to common shareholders and net income (loss) 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 certain dividends on its Series A Preferred Stock issued under the CPP since May 2010.  The Company did, however, receive approval from the FRB during the quarter ended June 30, 2012 to pay $1.00 million in dividends and interest accrued on missed dividend payments to the Treasury.  As a result of not receiving permission from the FRB to pay all dividends, the Company had not made five quarterly dividend payments (four full payments and one partial payment) totaling $900,000 at June 30, 2012.  There can be no assurances that the FRB will approve such payments or dividends in the future.  The Company has applied to the FRB for permission to pay the remaining accrued dividends, interest on the accrued dividends and to pay the dividend due on August 15, 2012.  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.  If 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.

(4) MBS AND OTHER INVESTMENTS
MBS and other investments have been classified according to management’s intent and are as follows as of June 30, 2012 and September 30, 2011 (dollars in thousands):
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
June 30, 2012
                       
Held to Maturity
                       
    MBS:
                       
          U.S. government agencies
  $ 1,577     $ 40     $ (5 )   $ 1,612  
          Private label residential
    1,899       212       (102 )     2,009  
    U.S. agency securities
    27       3       --       30  
      Total
  $ 3,503     $ 255     $ (107 )   $ 3,651  
                                 
Available for Sale
                               
    MBS:
                               
          U.S. government agencies
  $ 2,995     $ 145     $ --     $ 3,140  
          Private label residential
    1,050       56       (138 )     968  
    Mutual funds
    1,000       5       --       1,005  
       Total
  $ 5,045     $ 206     $ (138 )   $ 5,113  
                                 
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  


 
11

 

The estimated fair value of temporarily impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of June 30, 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
  $ - -     $ - -     $ 266     $ (5 )   $ 266     $ (5 )
       Private label residential
    92       (7 )     787       (95 )     879       (102 )
     Total
  $ 92     $ (7 )   $ 1,053     $ (100 )   $ 1,145     $ (107 )
                                                 
Available for Sale
 
                                               
   MBS:
                                               
       U.S. government agencies
  $ - -     $ - -     $ - -     $ - -     $ - -     $ - -  
       Private label residential
    - -       - -       660       (138 )     660       (138 )
   Mutual funds
    - -       - -       - -       - -       - -       - -  
     Total
  $ - -     $ - -     $ 660     $ (138 )   $ 660     $ (138 )
                                                 

During the three months ended June 30, 2012 and 2011, the Company recorded net OTTI charges through earnings on residential MBS of $37,000 and $165,000, respectively. During the nine months ended June 30, 2012 and 2011, the Company recorded net OTTI charges through earnings on residential MBS of $190,000 and $336,000, 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 and prepayment speeds included in 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 June 30, 2012 and September 30, 2011:

   
Range
   
Weighted
 
   
Minimum
   
Maximum
   
Average
 
At June 30, 2012
                 
Constant prepayment rate
    6.00 %     15.00 %     8.80 %
Collateral default rate
    0.85 %     25.67 %     9.20 %
Loss severity rate
    24.74 %     69.60 %     50.10 %
                         
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 %




 
12

 

The following tables present the OTTI for the three and nine months ended June 30, 2012 and 2011 (dollars in thousands):

 
Three Months Ended
June 30, 2012
   
Three Months Ended
June 30, 2011
 
Held To
Maturity
 
Available
For Sale
   
Held To
Maturity
 
Available
For Sale
Total OTTI
$    60
 
$    - -
   
$      41
 
$   29
Portion of OTTI recognized in other
   comprehensive (income) loss (before income           
   taxes) (1)
23
 
- -
   
(95)
 
- -
Net OTTI recognized in earnings (2)
$    37
 
$    - -
   
$    136
 
$   29
                 
 
Nine Months Ended
June 30, 2012
   
Nine Months Ended
June 30, 2011
 
Held To
Maturity
 
Available
For Sale
   
Held To
Maturity
 
Available
For Sale
Total OTTI
$  139
 
$  43
   
$  194
 
$   30
Portion of OTTI recognized in other
   comprehensive (income) loss (before income
   taxes) (1)
(8)
 
- -
   
(112)
 
- -
Net OTTI recognized in earnings (2)
$  147
 
$  43
   
$  306
 
$   30
________________________
(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 nine months ended June 30, 2012 and 2011 (in thousands):

   
Nine Months Ended June 30,
 
   
2012
   
2011
 
Beginning balance of credit loss
  $ 3,361     $ 4,725  
Additions:
               
       Credit losses for which OTTI was
          not previously recognized
    81       53  
       Additional increases to the amount
          related to credit loss for which OTTI
          was previously recognized
    109       283  
Subtractions:
               
       Realized losses previously recorded
          as credit losses
    (661 )     (1,390 )
Ending balance of credit loss
  $ 2,890     $ 3,671  

There was a gross realized gain on sales of securities for the three and nine months ended June 30, 2012 of $2,000 and $22,000, respectively. There were no gross realized gains on sales of securities for the three months ended June 30, 2011. There was a gross realized gain on sale of securities for the nine months ended June 30, 2011 of $79,000. During the three months ended June 30, 2012, the Company recorded a $242,000 realized loss (as a result of the securities being deemed worthless) on 19 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 nine months ended June 30, 2012, the Company recorded a $661,000 realized loss on 24 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 June 30, 2011, the
 
 
 
13

 
 
 
Company recorded a $509,000 realized loss (as a result of the securities being deemed worthless) on 22 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 nine months ended June 30, 2011, the Company recorded a $1.392 million realized loss on 23 held to maturity residential MBS and one available for sale residential MBS, of which $1.390 million had been recognized previously as a credit loss.

The amortized cost of residential MBS 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 $5.95 million and $7.77 million at June 30, 2012 and September 30, 2011, respectively.

The contractual maturities of debt securities at June 30, 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
  $ 15     $ 16     $ --     $ --  
Due after one year to five years
    9       9       72       76  
Due after five to ten years
    30       32       --       - -  
Due after ten years
    3,449       3,594       3,973       4,032  
       Total
  $ 3,503     $ 3,651     $ 4,045     $ 4,108  

(5) GOODWILL
During the quarter ended June 30, 2012, the Company engaged a third party firm to perform the annual test for goodwill impairment.  The test concluded that recorded goodwill was not impaired.  No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future.




 
14

 

(6) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable and loans held for sale consisted of the following at June 30, 2012 and September 30, 2011 (dollars in thousands):
 
   
June 30,
2012
   
September 30,
2011
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Mortgage loans:
                       
     One- to four-family (1)
  $ 109,624       19.5 %   $ 114,680       20.5 %
     Multi-family
    38,146       6.8       30,982       5.5  
     Commercial
    258,545       45.9       246,037       43.9  
     Construction and land development
    48,639       8.7       52,484       9.4  
     Land
    41,273       7.3       49,236       8.8  
         Total mortgage loans
    496,227       88.2       493,419       88.1  
                                 
Consumer loans:
                               
     Home equity and second mortgage
    34,080       6.1       36,008       6.4  
     Other
    6,413       1.1       8,240       1.5  
        Total consumer loans
    40,493       7.2       44,248       7.9  
                                 
Commercial business loans
    26,052       4.6       22,510       4.0  
                                 
        Total loans receivable
    562,772       100.0 %     560,177       100.0 %
                                 
Less:
                               
     Undisbursed portion of construction
             loans in process
    (12,239 )             (18,265 )        
     Deferred loan origination fees
    (1,761 )             (1,942 )        
     Allowance for loan losses
    (11,603 )             (11,946 )        
                                 
        Total loans receivable, net
  $ 537,169             $ 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 June 30, 2012 and September 30, 2011 (dollars in thousands):

   
June 30,
2012
   
September 30,
2011
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Custom and owner/builder
  $ 27,643       56.8 %   $ 26,205       49.9 %
Speculative one- to four-family
    2,122       4.4       1,919       3.7  
Commercial real estate
    17,920       36.8       12,863       24.5  
Multi-family
   (including condominiums)
    345       0.7       9,322       17.8  
Land development
    609       1.3       2,175       4.1  
   Total construction and
      land development loans
  $ 48,639       100.0 %   $ 52,484       100.0 %



 
15

 
Allowance for Loan Losses
The following tables set forth information for the three and nine months ended June 30, 2012 and June 30, 2011 regarding activity in the allowance for loan losses (dollars in thousands):

   
For the Three Months Ended June 30, 2012
 
   
Beginning
Allowance
   
Provision
/(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 931     $ (10 )   $ 92     $ 3     $ 832  
   Multi-family
    1,288       (116 )     3       3       1,172  
   Commercial
    3,737       1,104       288       --       4,553  
   Construction – custom and owner / builder
    267       160       --       --       427  
   Construction – speculative one- to four-family
    171       (64 )     --       --       107  
   Construction – commercial
    861       139       622       --       378  
   Construction – multi-family
    504       (480 )     24       --       --  
   Construction – land development
    95       (86 )     9       --       --  
   Land
    2,737       406       526       1       2,618  
Consumer loans:
                                       
   Home equity and second mortgage
    431       91       14       14       522  
   Other
    353       15       4       --       364  
Commercial business loans
    889       (259 )     --       --       630  
   Total
  $ 12,264     $ 900     $ 1,582     $ 21     $ 11,603  


   
For the Nine Months Ended June 30, 2012
 
   
Beginning
Allowance
   
Provision
/(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 760     $ 279     $ 211     $ 4     $ 832  
   Multi-family
    1,076       96       3       3       1,172  
   Commercial
    4,035       1,314       796       --       4,553  
   Construction – custom and owner / builder
    222       205       --       --       427  
   Construction – speculative one- to four-family
    169       (63 )     --       1       107  
   Construction – commercial
    794       206       622       --       378  
   Construction – multi-family
    354       (780 )     24       450       --  
   Construction – land development
    79       160       239       --       --  
   Land
    2,795       801       1,058       80       2,618  
Consumer loans:
                                       
   Home equity and second mortgage
    460       166       118       14       522  
   Other
    415       (27 )     24       --       364  
Commercial business loans
    787       243       401       1       630  
   Total
  $ 11,946     $ 2,600     $ 3,496     $ 553     $ 11,603  

 
16

 



   
For the Three Months Ended June 30, 2011
 
   
Beginning
Allowance
   
Provision
/(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 738     $ 250     $ 172     $ 1     $ 817  
   Multi-family
    1,016       88       --       11       1,115  
   Commercial
    4,179       (343 )     --       4       3,840  
   Construction – custom and owner / builder
    346       (92 )     --       --       254  
   Construction – speculative one- to four-family
    260       (63 )     --       --       197  
   Construction – commercial
    179       2,282       1,444       --       1,017  
   Construction – multi-family
    263       (125 )     --       --       138  
   Construction – land development
    28       667       667       --       28  
   Land
    3,254       790       1,147       6       2,903  
Consumer loans:
                                       
   Home equity and second mortgage
    505       (52 )     --       --       453  
   Other
    436       (8 )     --       --       428  
Commercial business loans
    594       6       --       --       600  
   Total
  $ 11,798     $ 3,400     $ 3,430     $ 22     $ 11,790  


   
For the Nine Months Ended June 30, 2011
 
   
Beginning
Allowance
   
Provision
/(Credit)
   
Charge-
offs
   
Recoveries
   
Ending
Allowance
 
Mortgage loans:
                             
   One-to four-family
  $ 530     $ 543     $ 405     $ 149     $ 817  
   Multi-family
    393       692       --       30       1,115  
   Commercial
    3,173       609       47       105       3,840  
   Construction – custom and owner / builder
    481       (227 )     --       --       254  
   Construction – speculative one- to four-family
    414       (177 )     40       --       197  
   Construction – commercial
    245       2,216       1,444       --       1,017  
   Construction – multi-family
    245       (107 )     --       --       138  
   Construction – land development
    240       938       1,150       --       28  
   Land
    3,709       709       1,560       45       2,903  
Consumer loans:
                                       
   Home equity and second mortgage
    922       (362 )     114       7       453  
   Other
    451       5       30       2       428  
Commercial business loans
    461       161       22       --       600  
   Total
  $ 11,264     $ 5,000     $ 4,812     $ 338     $ 11,790  





 
17

 



The following table presents information on the loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses at June 30, 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
 
                                     
June 30, 2012
                                   
Mortgage loans:
                                   
   One- to four-family
  $ 261     $ 571     $ 832     $ 4,032     $ 105,592     $ 109,624  
   Multi-family
    784       388       1,172       6,899       31,247       38,146  
   Commercial
    679       3,874       4,553       21,218       237,327       258,545  
   Construction – custom and owner /
      builder
    19       408       427       312       18,566       18,878  
   Construction – speculative one- to
      four-family
    24       83       107       700       770       1,470  
   Construction – commercial
    --       378       378       --       15,098       15,098  
   Construction –  multi-family
    --       --       --       345       --       345  
   Construction – land development
    --       --       --       609       --       609  
   Land
    818       1,800       2,618       9,511       31,762       41,273  
 Consumer loans:
                                     <