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, 2002
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 of Incorporation) (IRS Employer Identification No.)
624 Simpson Avenue, Hoquiam, Washington
(Address of principal executive office)
98550
(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 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 , 2002
----- ------------------------------------
common stock, $.01 par value 3,880,684
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6-7
Condensed Consolidated Statements of Comprehensive Income 8
Notes to Condensed Consolidated Financial Statements
(unaudited) 9-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-19
Item 3. Quantitative and Qualitative Disclosures about Market
Risk. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
CERTIFICATION 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and September 30, 2001
Dollars in Thousands
(unaudited)
June 30, September 30,
2002 2001
---------------------------------
Assets
Cash and due from financial institutions $ 7,494 $ 10,017
Interest bearing deposits in banks 24,476 3,422
Investments and mortgage-backed securities
(available for sale) 41,107 29,369
Federal Home Loan Bank stock 5,062 4,830
Loans receivable 319,763 308,796
Loans held for sale 4,892 18,022
Less: Allowance for loan losses (3,464) (3,050)
---------------------------
Total Loans 321,191 323,768
---------------------------
Accrued interest receivable 1,685 1,880
Premises and equipment 11,369 10,660
Real estate owned 918 1,006
Other assets 1,749 1,353
---------------------------
Total Assets $ 415,051 $ 386,305
---------------------------
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 276,648 $ 242,372
Federal Home Loan Bank ("FHLB") advances 61,796 68,978
Other liabilities and accrued expenses 2,103 3,146
---------------------------
Total Liabilities 340,547 314,496
---------------------------
Shareholders' Equity
Common Stock, $.01 par value; 50,000,000 shares
authorized;
June 30, 2002 - 4,441,376 issued, 3,880,684
outstanding September 30, 2001 - 4,570,995
issued, 4,010,303 outstanding (unallocated
ESOP shares and unvested MRDP shares are
not considered outstanding) 44 46
Additional paid in capital 37,554 39,574
Unearned shares - Employee Stock Ownership Plan (5,551) (5,948)
Unearned shares Management Recognition &
Development Plan (1,988) (2,471)
Retained earnings 43,985 40,332
Accumulated other comprehensive income (loss) 460 276
---------------------------
Total Shareholders' Equity 74,504 71,809
---------------------------
Total Liabilities and Shareholders'
Equity $ 415,051 $ 386,305
---------------------------
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended June 30, 2002 and 2001
Dollars in Thousands, Except Per Share Amounts
(unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
2002 2001 2002 2001
--------------------------- --------------------------
Interest and Dividend
Income
Loans receivable $ 6,771 $ 7,557 $ 21,017 $ 22,388
Investments and
mortgage-backed
securities 317 164 1,132 672
Dividends from
investments 258 224 592 580
Interest bearing
deposits in banks 60 32 123 137
-------------------- ----------------------
Total interest and
dividend income 7,406 7,977 22,864 23,777
Interest Expense
Deposits 1,793 2,451 5,768 7,198
Federal Home Loan
Bank advances 842 901 2,523 3,489
-------------------- ----------------------
Total interest
expense 2,635 3,352 8,291 10,687
-------------------- ----------------------
Net interest
income 4,771 4,625 14,573 13,090
Provision for Loan
Losses 200 800 792 1,150
-------------------- ----------------------
Net interest
income after
provision for
loan losses 4,571 3,825 13,781 11,940
Non-Interest Income
Service charges on
deposits 516 307 1,299 699
Gain on sale of loans,
net 251 185 751 336
Market value adjustment
on loans held for sale - - - - - - 175
Gain (loss) on sale of
securities 1 (22) (15) 205
Escrow fees 57 64 202 148
Servicing income on loans
sold 57 121 307 170
Other 307 202 853 530
-------------------- ----------------------
Total non-interest
income 1,189 857 3,397 2,263
Non-interest Expense
Salaries and employee
benefits 1,729 1,425 5,161 4,024
Premises and equipment 355 316 1,043 830
Advertising 169 270 601 681
Other 885 543 2,585 2,014
-------------------- ----------------------
Total non-interest
expense 3,138 2,554 9,390 7,549
Income before federal
income taxes 2,622 2,128 7,788 6,654
Federal Income Taxes 825 721 2,655 2,219
-------------------- ----------------------
Net Income $ 1,797 $ 1,407 $ 5,133 $ 4,435
Earnings Per Common Share:
Basic $0.46 $0.34 $1.31 $1.05
Diluted $0.45 $0.34 $1.27 $1.04
Weighted average shares
outstanding:
Basic 3,875,211 4,097,184 3,928,653 4,223,414
Diluted 4,037,034 4,198,706 4,052,061 4,283,383
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended September 30, 2001 and the nine months ended June 30, 2002
Dollars in Thousands Except Common Stock Shares
(unaudited)
Unearned
Shares Unearned Accumulated
Issued to Shares Other
Employee Issued to Compre-
Common Common Additional Stock Management hensive
Stock Shares Stock Paid-In Ownership Recognition Retained Income
Outstanding Amount Capital Trust Plan Earnings (Loss) Total
----------- ------ ------- ----- ---------- -------- ------ ------
<c> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, Sept. 30, 2000 4,361,279 $48 $42,250 ($6,477) $ - - $36,795 $ (304) $72,312
Net Income - - - - - - - - - - 5,462 - - 5,462
Issuance of MRDP Shares - - 2 3,222 - - (3,224) - - - - - -
Repurchase of Common Stock (428,827) (4) (5,914) - - - - - - - - (5,918)
Exercise of Stock Options 1,600 - - 19 - - - - - - - - 19
Cash Dividends
($.41 per share) - - - - - - - - - - (1,925) - - (1,925)
Earned ESOP Shares 35,266 - - (26) 529 - - - - - - 503
Earned MRDP Shares 40,985 - - 23 - - 753 - - - - 776
Change in fair value of
securities available for
sale, net of tax - - - - - - - - - - - - 580 580
--------------------------------------------------------------------------------
Balance, Sept. 30, 2001 4,010,303 46 39,574 (5,948) (2,471) 40,332 276 71,809
--------------------------------------------------------------------------------
Net Income - - - - - - - - - - 5,133 - - 5,133
Repurchase of Common Stock (156,872) (2) (2,411) - - - - - - - - (2,413)
Exercise of Stock Options 27,253 - - 327 - - - - - - - - 327
Cash Dividends
($.33 per share) - - - - - - - - - - (1,480) - - (1,480)
Earned ESOP Shares - - - - - - 397 - - - - - - 397
Earned MRDP Shares - - - - 64 - - 483 - - - - 547
Change in fair value of
securities available for
sale, net of tax - - - - - - - - - - - - 184 184
--------------------------------------------------------------------------------
Balance, June 30, 2002 3,880,684 $44 $37,554 ($5,551) ($1,988) $43,985 $460 $74,504
--------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2002 and 2001
Dollars in Thousands
(unaudited)
Nine Months Ended June 30,
Cash Flow from Operating Activities 2002 2001
------------------------
Net income $ 5,133 $ 4,435
------------------------
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 464 338
Federal Home Loan Bank stock dividends (233) (226)
Market value adjustment - loans held for sale - - (175)
Earned ESOP Shares 397 354
Earned MRDP Shares 528 - -
Loss (Gain) on sale of securities available
for sale 15 (205)
Gain on sale of real estate owned, net (7) (22)
Gain on sale of loans (751) (336)
Provision for loan and real estate owned
losses 864 1,465
Loans originated for sale (54,536) (7,313)
Proceeds from sale of loans 56,190 23,722
Net increase in other assets (315) 102
Decrease in other liabilities and accrued
expenses, net (1,043) (171)
------------------------
Net Cash Provided by Operating Activities 6,706 21,968
Cash Flow from Investing Activities
Net decrease (increase) in interest-bearing
deposits in banks (21,054) 1,275
Purchase of securities available for sale (15,000) (14,717)
Proceeds from maturities of securities
available for sale 3,480 9,735
Proceeds from sale of securities available
for sale 12,293 408
Increase in loans receivable, net (11,345) (17,090)
Additions to premises and equipment (1,173) (1,991)
Additions to real estate owned (673) (1,506)
Proceeds from sale of real estate owned 696 1,763
------------------------
Net Used in Investing Activities (32,776) (22,123)
Cash Flow from Financing Activities
Increase in deposits, net 34,276 16,380
Decrease in Federal Home Loan Bank
advances, net (7,182) (9,719)
Proceeds from exercise of stock options 346 - -
Repurchase of common stock (2,413) (3,619)
Payment of dividends (1,480) (1,404)
------------------------
Net Cash Provided by Financing Activities 23,547 1,638
Net Change in Cash (2,523) 1,483
Cash and Due from Financial Institutions
Beginning of period 10,017 8,893
------------------------
End of period $ 7,494 $ 10,376
------------------------
See notes to unaudited condensed consolidated financial statements
(continued)
6
Nine Months Ended June 30,
2002 2001
-------------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 2,280 $ 1,425
Interest paid 8,466 10,677
Supplemental Disclosure of Noncash Investing
Activities
Market value adjustment of securities held
for sale, net of tax 184 235
Investment securities acquired in loan
securitization 12,227 11,926
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended June 30, 2002 and 2001
Dollars in Thousands
(unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
2002 2001 2002 2001
-------------------------- -------------------------
Comprehensive Income:
Net income $1,797 $1,407 $5,133 $4,435
Change in fair value
of securities
available for sale,
net of tax 474 (49) 184 235
-------------------- -------------------
Total Comprehensive
Income $2,271 $1,358 $5,317 $4,670
See notes to unaudited condensed consolidated financial statements
8
Timberland Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited consolidated financial
statements for Timberland Bancorp, Inc. ("Company") were prepared in
accordance with accounting principles generally accepted in the United States
of America 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 accounting principles generally accepted in the United States
of America. However, all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the interim financial
statements have been included. All such adjustments are of a normal recurring
nature. The results of operations for the nine months ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the entire
fiscal year.
(b) Principles of Consolidation: The interim consolidated financial
statements include the accounts of Timberland Bancorp, Inc. and its
wholly-owned subsidiary, Timberland Bank ("Bank"), and the Bank's wholly-owned
subsidiary, Timberland Service Corp. All significant intercompany balances
have been eliminated in consolidation.
(c) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
9
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted earnings
per share is computed by dividing net income applicable to common stock by the
weighted average number of common shares and common stock equivalents for
items that are dilutive, net of shares assumed to be repurchased using the
treasury stock method at the average share price for the Company's common
stock during the period. Common stock equivalents arise from assumed
conversion of outstanding stock options and awarded but not released
Management Recognition and Development Plan ("MRDP") shares. In accordance
with Statement of Position ("SOP") 93-6, Employers' Accounting for Employee
Stock Ownership Plans (ESOP), issued by the American Institute of Certified
Public Accountants, shares owned by the Bank's Employee Stock Ownership Plan
that have not been allocated are not considered to be outstanding for the
purpose of computing earnings per share. At June 30, 2002, there were 396,750
ESOP shares that had not been allocated.
Three Months Ended June 30, Nine Month Ended June 30,
2002 2001 2002 2001
-------------------------- ------------------------
Basic EPS computation
Numerator - Net
Income $1,797,000 $1,407,000 $5,133,000 $4,435,000
Denominator -
Weighted average
common shares
outstanding 3,875,211 4,097,184 3,928,653 4,223,414
Basic EPS $ 0.46 $ 0.34 $ 1.31 $ 1.05
Diluted EPS
computation
Numerator - Net
Income $1,797,000 $1,407,000 $5,133,000 $4,435,000
Denominator -
Weighted average
common shares
outstanding 3,875,211 4,097,184 3,928,653 4,223,414
Effect of dilutive
stock options 127,502 101,522 104,271 59,969
Effect of dilutive
MRDP 34,321 -- 19,137 --
---------- ---------- ---------- ----------
Weighted average
common shares and
common stock
equivalents 4,037,034 4,198,706 4,052,061 4,283,383
Diluted EPS $ 0.45 $ 0.34 $ 1.27 $ 1.04
(3) DIVIDEND
On July 15, 2002, the Company announced a quarterly cash dividend of $0.12 per
common share. The dividend is to be paid August 20, 2002, to shareholders of
record as of the close of business August 6, 2002.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three and
nine months ended June 30, 2002. This report contains certain
"forward-looking statements." The Company desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is including this statement for the express purpose of availing
itself of the protection of such safe harbor with forward looking statements.
These forward looking statements may describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include competition in
the financial services market for both deposits and loans, interest rate
trends, the economic climate in the Company's market areas and the country as
a whole, loan delinquency rates, and changes in federal and state regulation.
These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
Comparison of Financial Condition at June 30, 2002 and September 30, 2001
Total Assets: Total assets increased by $28.7 million to $415.1 million at
June 30, 2002 from $386.3 million at September 30, 2001 primarily due to
increased deposit levels.
Cash and Due from Financial Institutions: Cash and due from financial
institutions decreased to $7.5 million at June 30, 2002 from $10.0 million at
September 30, 2001.
Interest Bearing Deposits in Banks: Interest bearing deposits in banks
increased to $24.5 million at June 30, 2002 from $3.4 million at September 30,
2001, primarily due to proceeds received from increased customer deposits and
the sale of fixed rate one-to-four family mortgage loans.
Investments and Mortgage-backed Securities: Investments and mortgage-backed
securities increased to $41.1 million at June 30, 2002 from $29.4 million at
September 30, 2001. This increase is primarily due to investing proceeds from
the conversion of $12.2 million in fixed rate loans held for sale to
mortgage-backed securities.
Loans Receivable, and Loans Held-for-sale, net of allowance for loan losses:
Net loans receivable, including loans held-for-sale, decreased $2.6 million to
$321.2 million at June 30, 2002 from $323.8 at September 30, 2001, primarily
due to a $20.6 million decrease in the Bank's net construction loan portfolio
and a $15.5 million decrease in the Bank's one-to-four family mortgage loan
portfolio. The construction loan decrease resulted primarily from the pay down
of loans secured by condominium projects pursuant to unit sales and the
conversion of construction loans to permanent status. The decrease of
one-to-four family mortgages held in the portfolio was due to the conversion
of $12.2 million of loans held for sale to mortgage-backed securities and the
sale of $55.4 million in fixed rate one-to-four family mortgage loans during
the nine-month period. The decreases in construction and one-to-four family
mortgages were partially offset by a $30.3 million increase in commercial real
estate loans, which was primarily the result of the activities of the Bank's
Business Banking Division.
11
Real Estate Owned ("REO"): Real estate owned decreased $88,000 to $918,000
for June 30, 2002 from $1.01 million at September 30, 2001.
Premises and Equipment: Premises and equipment increased by $709,000 to $11.4
million at June 30, 2002 from $10.7 million at September 30, 2001. This
increase is primarily due to the purchase of a building in Olympia (Thurston
County) for a future branch and the acquisition of a building in Hoquiam
(Grays Harbor County) for future office space.
Deposits: Deposits increased by 14.1% to $276.6 million at June 30, 2002
from $242.4 million at September 30, 2001, primarily due to a $20.5 million
increase in the Bank's money market accounts, a $7.0 million increase in N.O.W
checking accounts, an $8.3 million increase in passbook savings accounts and a
$3.6 million increase in non-interest bearing accounts. Management attributes
the deposit growth to its targeted marketing program and to consumer
uncertainty regarding the volatile stock market.
Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased by 10.4% to
$61.8 million at June 30, 2002 from $69.0 million at September 30, 2001, as
funds from increased deposits and loan sales were used to pay down the level
of advances.
Shareholders' Equity: Total shareholders' equity increased by $2.7 million to
$74.5 million at June 30, 2002 from $71.8 million at September 30, 2001. The
components of shareholders' equity were affected by net income of $5.1
million, the repurchase of 156,872 shares of the Company's stock for $2.4
million, the payment of $1.5 million in dividends to shareholders, and a
$184,000 increase in accumulated other comprehensive income. Also affecting
shareholders' equity was a $483,000 decrease in the equity component related
to unearned shares issued to the Management Recognition and Development Plan,
a $397,000 decrease in the equity component related to the unearned shares
issued to the Employee Stock Ownership Plan, and a $346,000 increase to
additional paid in capital from the exercise of stock options.
On May 10, 2002 the Company announced a plan to repurchase 193,659 shares of
the Company's stock. This marked the Company's tenth 5% stock repurchase
plan. As of June 30, 2002, the Company had not yet purchased any shares under
the current plan. The Company has now repurchased 2,404,904 (36.4%) of the
6,612,500 shares that were issued when the Company went public in January
1998.
Non-performing Assets: Total non-performing assets increased to $5.4 million
for June 30, 2002 from $5.1 million at September 30, 2001. The Company's
non-performing asset ratio to total asset ratio ("NPA") decreased to 1.31% at
June 30, 2002 from 1.32% at September 30, 2001. Nonaccrual loans increased
$410,000 to $4.5 million at June 30, 2002 from $4.1 million at September 30,
2001. The increase was primarily a result of a $1.5 million increase in
one-to-four family nonaccrual loans and a $411,000 increase in multi-family
nonaccrual mortgages. These increases were partially offset by a $1.5 million
decrease in commercial real estate loans on non-accrual status.
12
Non Performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
nonperforming assets at June 30, 2002 and September 30, 2001.
At June 30, At September 30,
2002 2001
------------------------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to-four family $ 2,565 $ 863
Multi family 411 --
Commercial 561 2,091
Construction and land development 521 491
Land 265 610
Consumer loans 129 26
Commercial Business Loans 49 10
--------- ---------
Total 4,501 4,091
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans: - - - -
Total of nonaccrual and
90 days past due loans 4,501 4,091
Real estate owned and other
repossessed assets 918 1,006
--------- ---------
Total nonperforming assets 5,419 5,097
Restructured loans - - - -
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, (including loans held for sale)(1) 1.39% 1.25%
Nonaccrual and 90 days or more past
due loans as a percentage of total assets 1.08% 1.06%
Nonperforming assets as a percentage
of total assets 1.31% 1.32%
Loans receivable, (including loans
held for sale) (1) $ 324,655 $ 326,818
========= =========
Total assets $ 415,051 $ 386,305
========= =========
- --------------
(1) Loans receivable is before the allowance for loan losses
13
Loans Receivable
- ----------------
The following table sets forth the composition of the Company's loan portfolio
by type of loan.
At June 30, At September 30,
2002 2001
Amount Percent Amount Percent
-------------------- --------------------
(Dollars In thousands)
Mortgage Loans:
One-to-four family (1)(2) $114,571 31.68% $130,082 35.14%
Multi family 27,291 7.55 29,412 7.95
Commercial 96,040 26.55 65,731 17.76
Construction and land
development 79,613 22.01 106,244 28.71
Land 15,933 4.40 13,632 3.68
-------- ------ -------- ------
Total mortgage loans 333,448 92.19 345,101 93.24
Consumer Loans:
Home equity and second
mortgage 12,403 3.43 11,039 2.98
Other 7,708 2.13 6,825 1.85
-------- ------ -------- ------
20,111 5.56 17,864 4.83
Commercial business loans 8,148 2.25 7,150 1.93
-------- ------ -------- ------
Total loans 361,707 100.00% 370,115 100.00%
====== ======
Less:
Undisbursed portion of
loans in process (33,733) (39,803)
Unearned income (3,319) (3,494)
Allowance for loan losses (3,464) (3,050)
Market value adjustment of
loans held-for-sale - - - -
-------- --------
Total loans receivable, net $321,191 $323,768
======== ========
- ----------------
(1) Includes loans held-for-sale.
(2) Includes real estate contracts totaling $1.1 million at June 30, 2002.
Activity in the Allowance for Loan Losses
- -----------------------------------------
Activity in the allowance for loan losses in the six months ended June 30,
2002 and 2001 is as follows:
2002 2001
------ ------
Balance beginning of period $3,050 $2,640
Provision for loan losses 792 1,150
Loans charged off (486) (765)
Recoveries on loans previously
charged off 108 21
Net charge offs (378) (744)
Balance at end of period $3,464 $3,046
14
Deposit Breakdown
- -----------------
The following table sets forth the balances of deposits in the various types
of accounts offered by the Bank at the dates indicated.
At June 30, 2002 At September 30, 2001
---------------- ---------------------
(in thousands) (in thousands)
Non-interest bearing $ 20,616 $ 16,976
N.O.W. checking 37,659 30,626
Passbook savings 42,574 34,228
Money market accounts 47,726 27,251
Certificates of deposit under
$100,000 91,982 88,449
Certificates of deposit
$100,000 and over 36,091 44,842
--------- ---------
Total Deposits $ 276,648 $ 242,372
========= =========
Comparison of Operating Results for the Three and Nine Months Ended June 30,
2002 and 2001
Net Income: Net income for the quarter ended June 30, 2002 was $1.80 million,
or $0.45 per diluted share ($0.46 per basic share) compared to $1.41 million,
or $0.34 per diluted share ($0.34 per basic share) for the quarter ended June
30, 2001. Primary factors affecting the improved performance in 2002 were
increased net interest income, a decreased provision for loan losses,
increased fee income, and increased gains on the sale of mortgage loans.
These increases were partially offset by higher non-interest expenses. Net
income was also increased to a lesser extent during the current quarter by
reducing income tax expense by $65,000 as a result of overaccruals in earlier
quarters.
Net income for the nine months ended June 30, 2002 was $5.13 million or $1.27
per diluted share ($1.31 per basic share) compared to net income of $4.44
million or $1.04 per diluted share ($1.05 per basic share) for the nine months
ended June 30, 2001.
Net Interest Income: Net interest income increased 3.2% to $4.8 million for
the quarter ended June 30, 2002 from $4.6 million for the quarter ended June
30, 2001, primarily due to decreased funding costs. Total interest expense
decreased $717,000 to $2.6 million for the quarter ended June 30, 2002 from
$3.4 million for the quarter ended June 30, 2001. The average cost of funds
for each of the Bank's deposit account types for the current quarter was lower
than a year ago. The overall cost of funds decreased to 3.42% for the quarter
ended June 30, 2002 from 4.78% for the quarter ended June 30, 2001. Total
interest income decreased to $7.4 million for the quarter ended June 30, 2002
from $8.0 million for the quarter ended June 30, 2001, primarily due to a
decrease in average yields of earning assets. The yield on earning assets was
7.65% for the quarter ended June 30, 2002 compared to 8.99% for the quarter
ended June 30, 2001. The impact of lower average yields was, however,
partially offset by increased levels of average earning assets. As a result
of these changes, net interest margin decreased to 4.93% the quarter ended
June 30, 2002 from 5.21% for the quarter ended June 30, 2001.
Net interest income increased 11.3 % to $14.6 million for the nine months
ended June 30, 2002 from $13.1 million for the nine months ended June 30,
2001, primarily due to decreased funding costs. Interest expense decreased by
$2.4 million to $8.3 million for the nine months ended June 30, 2002 from
$10.7 million for the nine months ended June 30, 2001. The Company's overall
cost of funds decreased to 3.71% for the nine months
15
ended June 30, 2002 from 5.11% for the nine months ended June 30, 2001 due to
lower average cost of funds for each type of the Bank's deposit accounts and
lower average borrowings from the FHLB. Total interest income decreased
$913,000 to $22.9 million for the nine months ended June 30, 2002 from $23.8
million for the nine months ended June 30, 2001 primarily due to lower average
yields on interest earning assets, from 8.97% in 2001 to 8.13% in 2002. Net
interest margin was 5.18% for the nine months ended June 30, 2002 compared to
a net interest margin of 4.94% for the nine months ended June 30, 2001, due to
liabilities repricing more quickly than interest earning assets in the
reducing rate environment. The Company anticipates further margin compression
in the upcoming quarter as portions of the Bank's loan portfolio are scheduled
to reprice downward at a greater rate than the Bank's funding sources will be
able to reprice.
Provision for Loan Losses: The provision for loan losses decreased to
$200,000 for the three months ended June 30, 2002 from $800,000 for the three
months ended June 30, 2001. The provision for loan losses for the nine
months ended June 30, 2002 was $792,000 compared to $1.15 million for the nine
months ended June 30, 2001. The provision for loan losses was larger in 2001
primarily due to the deterioration and charge-off of a large commercial
business loan during the June 30, 2001 quarter. Management conducts regular
analyses of the Bank's loan portfolio, which it uses to review the adequacy of
its allowance for loan losses. The analyses present data on loans by type of
loan, internal loan classifications, historical loss percentages and economic
factors considered by management in reviewing the allowance for loan losses.
Based on its internal analysis at June 30, 2002 and trends in the loan
portfolio, managment deemed the allowance for loan losses of $3.5 million at
June 30, 2002 (1.08% of loans receivable and 77.0% 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. The allowance for loan
losses was $3.1 million (1.00% of loans receivable and 62.7% of non-performing
loans) at June 30, 2001. Net charge-offs for the current quarter were $186,000
compared to $587,000 in the same quarter of 2001. For the nine months ended
June 30, 2002 and 2001, net charge-offs were $378,000 and $744,000,
respectively.
Noninterest Income: Total non-interest income increased to $1.19 million for
the quarter ended June 30, 2002 from $857,000 for the quarter ended June 30,
2001, primarily due to a $209,000 increase in service charges on deposits and
a $66,000 increase in the gain on sale of loans. The increased deposit-related
service charge income is primarily a result of the Bank's checking account
acquisition program. The increased loan sale gains are a result of the
Company selling $15.5 million in fixed-rate one-to-four family loans during
the quarter.
For the nine months ended June 30, 2002 non-interest income increased $1.1
million to $3.4 million from $2.3 million for the nine months ended June 30,
2001. This increase is primarily due to a $600,000 increase in service
charges on deposits, and a $415,000 increase in gain on sale of loans.
Noninterest Expense: Total non-interest expense increased to $3.1 million for
the three months ended June 30, 2002 from $2.6 million for the three months
ended June 30, 2001. This increase is primarily due to a $304,000 increase in
salary and employee benefit expense and an $81,000 increase in ATM operating
expenses. The increase in salary and benefit expense is primarily a result of
adding employees to staff the Bank's newest branch (Tacoma), hiring additional
commercial loan staff to manage the Bank's business banking activities, and
expenses associated with the Management Recognition and Development Plan.
Also affecting the quarter-to-quarter comparison, was the recovery of a prior
NSF kiting related expense during the quarter ended June 30, 2001. This
recovery reduced the non-interest expense for the quarter ended June 30, 2001
by $150,000.
Total non-interest expense increased $1.8 million for the nine months ended
June 30, 2002 compared to 2001, essentially related to the same factors that
affected non-interest expenses for the quarter ended June 30, 2002 compared to
the quarter ended June 30, 2001.
16
Provision for Income Taxes: The provision for income taxes increased to $2.7
million for the nine months ended June 30, 2002 from $2.2 million for the nine
months ended June 30, 2001 primarily as a result of higher income before
income taxes. The Company's effective tax rate was 34.1% in 2002 compared to
33.3% in 2001.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans and mortgage backed securities, and
proceeds from the sale of loans, maturing securities and FHLB advances. While
maturities and the 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 analysis of liquidity should also include a review of the changes that
appear in the consolidated statement of cash flows for the nine months ended
June 30, 2002. The statement of cash flows includes operating, investing and
financing categories. Operating activities include net income, which is
adjusted for non-cash items, and increases or decreases in cash due to certain
changes in assets and liabilities. Investing activities consist primarily of
both proceeds from maturities and sales of securities and purchases of
securities, and the net growth in loans. Financing activities present the
cash flows associated with the Company's deposit accounts and other
borrowings.
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 June 30, 2002,
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 27.4%.
The Bank also maintained an uncommitted credit facility with the FHLB-Seattle
that provided for immediately available advances up to an aggregate amount of
$134.0 million, under which $61.8 million was outstanding at June 30, 2002.
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, commercial mortgage loans, and construction and land
development loans. At June 30, 2002, the Bank had loan commitments totaling
$20.2 million and undisbursed loans in process totaling $33.7 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 June 30, 2002 totaled $99.1 million. Historically,
the Bank has been able to retain a significant amount of its deposits as they
mature.
17
Federally-insured state-chartered banks are required to maintained 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 June 30, 2002, the Bank was in compliance with all applicable
capital requirements. For additional details see "Regulatory Capital".
Regulatory Capital
- ------------------
The following table compares the Bank's regulatory capital at June 30, 2002 to
its minimum regulatory capital requirements at that date (dollars in
thousands):
Percent of
Amount Adjusted Total Assets (1)
------ -------------------------
Tier 1 (leverage) capital $63,582 15.9%
Tier 1 (leverage) capital
requirement 15,994 4.0
------- ----
Excess $47,588 11.9%
======= ====
Tier 1 risk adjusted capital $63,582 21.2%
Tier 1 risk adjusted capital
requirement 12,024 4.0
------- ----
Excess $51,558 17.2%
======= ====
Total risk based capital $67,046 22.3%
Total risk based capital
requirement 24,047 8.0
------- ----
Excess $42,999 14.3%
======= ====
- -------------------
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$399.8 million. For the Tier 1 risk-based capital and total risk-based
capital calculations, percent of total risk-weighted assets of $300.6 million.
18
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
Three Months Ended June 30, Nine Months Ended June 30,
2002 2001 2002 2001
--------------------------- --------------------------
PERFORMANCE RATIOS:
Return on average
assets (1) 1.78% 1.52% 1.75% 1.60%
Return on average
equity (1) 9.78% 7.84% 9.44% 8.17%
Net interest
margin (1) 4.93% 5.21% 5.18% 4.94%
Efficiency ratio 52.65% 46.59% 52.25% 49.17%
June 30, September 30,
2002 2001
--------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 4,501 $ 4,091
REO & other repossessed assets 918 1,006
Total non-performing assets 5,419 5,097
Non-performing assets to total assets 1.31% 1.32%
Allowance for loan losses to
non-performing loans 76.96% 74.55%
Book Value Per Share (2) $ 16.77 $ 15.71
Book Value Per Share (3) $ 18.30 $ 17.20
- ----------------------
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
(3) Calculation excludes ESOP shares not committed to be released
Three Months Ended June 30, Nine Months Ended June 30,
2002 2001 2002 2001
--------------------------- --------------------------
AVERAGE BALANCE
SHEET:
Average Total Loans $323,438 $326,099 $322,037 $322,847
Average Total Interest
Earning Assets 387,003 354,907 375,126 353,375
Average Total Assets 404,018 371,107 391,662 368,505
Average Total Interest
Bearing Deposits 246,258 213,488 233,944 201,718
Average FHLB Advances 61,839 67,139 63,816 77,057
Average Shareholders'
Equity 73,526 71,814 72,510 72,352
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
There were no material changes in information concerning market risk from the
information provided in the Company's Form 10-K for the fiscal year ended
September 30, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -----------------------------
Neither the Company nor the Bank is a party to any material legal proceedings
at this time. Further, neither the Company nor the Bank is aware of the
threat of any such proceedings. From time to time, the Bank is involved in
various claims and legal actions arising in the ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
- -----------------------------------------------------
Change in Securities -- None to be reported.
Use of proceeds -- None to be reported.
Item 3. Defaults Upon Senior Securities
- -------------------------------------------
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
None to be reported.
Item 5. Other Information
- -----------------------------
None to be reported.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant *
3(b) Bylaws of the Registrant *
10(a) Employee Severance Compensation Plan **
10(b) Timberland Savings Bank, S.S.B. Employee Stock Ownership
Plan **
10(c) Timberland Bancorp, Inc. 1999 Stock Option Plan ***
10(d) Timberland Bancorp, Inc. Management Recognition and
Development Plan ***
-----------------
* Incorporated by reference to the Registrant's Registration
Statement of 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.
*** Incorporated by reference to the Registrant's Annual Meeting
Proxy Statement dated December 15, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2002.
20
SIGNATURES
Pursuant to the requirements 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: August 8, 2002 By:/s/ Clarence E. Hamre
----------------------------
Clarence E. Hamre
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 8, 2002 By:/s/ Dean J. Brydon
----------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
21
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF TIMBERLAND BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-Q, that:
* the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
* the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Clarence C. Hamre /s/ Dean J. Brydon
- ------------------------------ -----------------------------
Clarence C. Hamre Dean J. Brydon
Chief Executive Officer Chief Financial Officer
Date: August 8, 2002
22