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, 2005
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 ___
--- ---
Check whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act): 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, 2005
----- -----------------------------------
common stock, $.01 par value 3,738,737
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
Selected Notes to Condensed Consolidated
Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial Condition 13-25
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 26-27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and September 30, 2004
In Thousands
(unaudited)
June 30, September 30,
2005 2004
------------------------
Assets
Cash and due from financial institutions $ 17,391 $ 15,268
Interest bearing deposits in banks 7,321 3,385
Federal funds sold 4,090 1,180
Investment securities held to maturity 127 174
Investment securities available for sale 91,792 59,889
Federal Home Loan Bank ("FHLB") stock 5,705 5,682
Loans receivable 388,236 347,975
Loans held for sale 2,673 610
Less: Allowance for loan losses (4,103) (3,991)
------------------------
Total Loans 386,806 344,594
------------------------
Accrued interest receivable 2,144 1,828
Premises and equipment 15,759 13,913
Real estate owned and other repossessed items 372 421
Bank owned life insurance ("BOLI") 11,348 11,028
Goodwill 5,650 --
Core deposit intangible 1,927 --
Other assets 2,447 3,057
------------------------
Total Assets $552,879 $460,419
------------------------
Liabilities and Shareholders' Equity
Liabilities
Deposits $408,163 $319,570
FHLB advances 67,400 65,421
Other borrowings: repurchase agreements 1,091 --
Other liabilities and accrued expenses 3,236 2,611
------------------------
Total Liabilities 479,890 387,602
------------------------
Shareholders' Equity
Common Stock, $.01 par value; 50,000,000 shares
authorized;
June 30, 2005 - 3,738,737 shares issued and
outstanding
September 30, 2004 - 3,882,070 shares issued
and outstanding 38 39
Additional paid in capital 21,479 24,867
Unearned shares - Employee Stock Ownership Plan
("ESOP") (3,966) (4,362)
Unearned shares - Management Recognition &
Development Plan ("MRDP") (54) (537)
Retained earnings 56,030 52,967
Accumulated other comprehensive loss (538) (157)
------------------------
Total Shareholders' Equity 72,989 72,817
------------------------
Total Liabilities and Shareholders' Equity $552,879 $460,419
------------------------
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, 2005 and 2004
In Thousands, Except Per Share Amounts
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
-------------------- ------------------
2005 2004 2005 2004
Interest and Dividend Income
Loans receivable $ 7,170 $ 6,099 $20,271 $18,324
Securities available for sale and
held to maturity 550 234 1,459 717
Dividends from investments 270 243 788 762
Interest bearing deposits in banks 47 16 252 97
------------------- ------------------
Total interest and dividend income 8,037 6,592 22,770 19,900
Interest Expense
Deposits 1,382 988 3,819 3,199
FHLB advances and other borrowings 846 723 2,347 2,383
------------------- ------------------
Total interest expense 2,228 1,711 6,166 5,582
------------------- ------------------
Net interest income 5,809 4,881 16,604 14,318
Provision for loan losses 96 14 116 94
------------------- ------------------
Net interest income after 5,713 4,867 16,488 14,224
provision for loan losses
Non-Interest Income
Service charges on deposits 723 510 2,062 1,409
Gain on sale of loans, net 181 159 613 585
Loss on sale of securities -- -- -- (6)
BOLI net earnings 111 111 320 338
Servicing income on loans sold 110 18 199 265
ATM transaction fees 223 166 632 462
Other 200 154 600 445
------------------- ------------------
Total non-interest income 1,548 1,118 4,426 3,498
Non-Interest Expense
Salaries and employee benefits 2,528 2,155 7,726 6,561
Premises and equipment 597 426 1,675 1,353
Advertising 187 207 565 559
Real estate owned expense (income) 19 48 (11) (27)
ATM expenses 134 111 350 303
Postage and courier 80 85 381 272
Amortization of core deposit
intangible 94 -- 273 --
Other 826 862 2,937 2,542
------------------- ------------------
Total non-interest expense 4,465 3,894 13,896 11,563
Income before federal income taxes 2,796 2,091 7,018 6,159
Federal income taxes 961 645 2,238 1,904
------------------- ------------------
Net Income $ 1,835 $ 1,446 $ 4,780 $ 4,255
=================== ==================
Earnings Per Common Share:
Basic $0.54 $0.41 $1.37 $1.16
Diluted $0.51 $0.39 $1.31 $1.10
Weighted Average Shares Outstanding:
Basic 3,415,644 3,492,286 3,486,589 3,681,059
Diluted 3,574,410 3,671,143 3,645,658 3,860,573
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, 2004 and the nine months ended June 30, 2005
In Thousands Except Common Stock Shares
(unaudited)
Accumulated
Other
Unearned Unearned Compre-
Common Common Additional Shares Shares hensive
Stock Shares Stock Paid-In Issued to Issued to Retained Income
Outstanding Amount Capital ESOP MRDP Earnings (Loss) Total
----------- ------ ------- --------- --------- -------- ------ -------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, Sept. 30, 2003 4,251,680 $43 $33,775 ($4,891) ($1,182) $49,699 167 $77,611
Net income - - - - - - - - - - 5,588 - - 5,588
Repurchase of
common stock (482,016) (5) (11,074) - - - - - - - - (11,079)
Exercise of stock options 112,406 1 1,747 - - - - - - - - 1,748
Cash dividends
($.57 per share) - - - - - - - - - - (2,320) - - (2,320)
Earned ESOP shares - - 283 529 - - - - - - 812
Earned MRDP shares - - 136 - - 645 - - - - 781
Change in fair value of
securities available
for sale, net of tax - - - - - - - - - - - - (324) (324)
--------------------------------------------------------------------------------
Balance, Sept. 30, 2004 3,882,070 39 24,867 (4,362) (537) 52,967 (157) 72,817
--------------------------------------------------------------------------------
Net income - - - - - - - - - - 4,780 - - 4,780
Repurchase of
common stock (174,434) (1) (4,063) - - - - - - - - (4,064)
Exercise of stock options 31,101 - - 436 - - - - - - - - 436
Cash dividends
($.45 per share) - - - - - - - - - - (1,717) - - (1,717)
Earned ESOP shares - - - - 222 396 - - - - - - 618
Earned MRDP shares - - - - 17 - - 483 - - - - 500
Change in fair value of
securities available
for sale, net of tax - - - - - - - - - - - - (381) (381)
--------------------------------------------------------------------------------
Balance, June 30, 2005 3,738,737 $38 $21,479 ($3,966) ($54) $56,030 ($538) $72,989
--------------------------------------------------------------------------------
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, 2005 and 2004
In Thousands
(unaudited)
Nine Months
Ended June 30,
2005 2004
Cash Flow from Operating Activities --------------------
Net income $4,780 $4,255
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 696 562
Amortization of core deposit intangible 273 --
FHLB stock dividends (23) (179)
Earned ESOP shares 618 612
Earned MRDP shares 500 517
Loss on sale of securities available for sale -- 6
Gain on sale of real estate owned, net (38) (85)
Loss on sale of premises and equipment 13 --
BOLI cash surrender value increase (320) (338)
Gain on sale of loans (613) (585)
Provision for loan and real estate owned losses 128 107
Loans originated for sale (18,319) (32,892)
Proceeds from sale of loans 16,869 33,866
(Increase) decrease in other assets, net 284 (184)
Increase (decrease) in other liabilities and
accrued expenses, net 578 (413)
--------------------
Net Cash Provided by Operating Activities 5,426 5,249
Cash Flow from Investing Activities
Net (increase) decrease in interest-bearing
deposits in banks (3,936) 27,773
Increase in federal funds sold (2,910) --
Purchase of securities available for sale (38,972) (9,000)
Proceeds from maturities of securities
available for sale 6,485 7,244
Proceeds from maturities of securities held to maturity 46 --
Proceeds from sale of securities available for sale -- 1,600
Increase in loans receivable, net (40,346) (12,540)
Additions to premises and equipment (497) (1,038)
Purchase of branches, net of cash and cash equivalents 76,630 --
Proceeds from the disposition of premises and equipment 6 --
Proceeds from sale of real estate owned 368 1,084
--------------------
Net Cash Provided by (Used in) Investing Activities (3,126) 15,123
Cash Flow from Financing Activities
Increase (decrease) in deposits, net 2,098 (79)
Increase (decrease) in Federal Home Loan Bank
advances, net 1,979 (5,626)
Increase in repurchase agreements 1,091 --
Proceeds from exercise of stock options 436 1,602
Repurchase of common stock (4,064) (10,646)
Payment of dividends (1,717) (1,737)
--------------------
Net Cash Used in Financing Activities (177) (16,486)
See notes to unaudited condensed consolidated financial statements (continued)
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the nine months ended June 30, 2005 and 2004
In Thousands
(unaudited)
Nine Months
Ended June 30,
2005 2004
---------------------
Net Change in Cash 2,123 3,886
Cash and Due from Financial Institutions
Beginning of period 15,268 8,587
---------------------
End of period $ 17,391 $ 12,473
=====================
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 1,450 $ 1,560
Interest paid 5,984 5,644
Supplemental Disclosure of Non-cash Investing Activities
Market value adjustment of securities held for
sale, net of tax (381) (431)
Loans transferred to real estate owned 268 206
Supplemental Disclosure of Branch Acquisition
Premium paid on deposits (7,848) --
Fair value of assets acquired, principally
property and equipment (2,064) --
Deposits assumed 86,495 --
Other liabilities assumed 47 --
---------------------
Net cash provided by branch acquisition $ 76,630 $ --
=====================
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, 2005 and 2004
In Thousands
(unaudited)
Three Months Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
---------------- ----------------
Comprehensive Income:
Net Income $1,835 $1,446 $4,780 $4,255
Change in fair value of securities
available for sale, net of tax 211 (447) (381) (431)
---------------- ----------------
Total Comprehensive Income $2,046 $ 999 $4,399 $3,824
================ ================
See notes to unaudited condensed consolidated financial statements
8
Timberland Bancorp, Inc. and Subsidiaries
Selected Notes to Condensed Consolidated Financial Statements (unaudited)
(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 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 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 financial
statements included in the Timberland Bancorp, Inc. Annual Report on Form 10-K
for the year ended September 30, 2004. The results of operations for the three
and nine months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
(b) Principles of Consolidation: The interim condensed 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.
(d) Certain prior period amounts have been reclassified between interest
income and servicing income on loans sold to conform to the June 30, 2005
presentation. There was no change to net income or shareholder's equity
amounts previously reported.
9
(2) EARNINGS PER SHARE ("EPS")
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
restricted shares of common stock under the MRDP. 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 ESOP that have not been allocated are
not considered to be outstanding for the purpose of computing earnings per
share. At June 30, 2005 and 2004, there were 290,949 and 326,216 ESOP shares,
respectively, that had not been allocated.
Three Months Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
---------------------- ----------------------
Basic EPS computation
Numerator - Net income $1,835,000 $1,446,000 $4,780,000 $4,255,000
Denominator - Weighted
average common shares
outstanding 3,415,644 3,492,286 3,486,589 3,681,059
---------- ---------- ---------- ----------
Basic EPS $ 0.54 $ 0.41 $ 1.37 $ 1.16
Diluted EPS computation
Numerator - Net income $1,835,000 $1,446,000 $4,780,000 $4,255,000
Denominator - Weighted
average common shares
outstanding 3,415,644 3,492,286 3,486,589 3,681,059
Effect of dilutive stock
options 129,094 141,104 136,275 148,126
Effect of dilutive MRDP 29,672 37,753 22,794 31,388
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents 3,574,410 3,671,143 3,645,658 3,860,573
---------- ---------- ---------- ----------
Diluted EPS $ 0.51 $ 0.39 $ 1.31 $ 1.10
10
(3) STOCK BASED COMPENSATION
At June 30, 2005 the Company has an employee, officer, and director stock
option plan. The Company accounts for options granted under that plan under
the recognition and measurement principles of Accounting Principles Bulletin
("APB") No. 25, Accounting for Stock Issued to Employees and related
interpretations. Accordingly, no stock-based compensation cost is reflected
in net income as the exercise price for all options granted under the plan was
equal to the market value of the Company's stock on the date of grant.
During the quarter ended June 30, 2005 the Company announced that its Board of
Directors had accelerated the vesting of out of the money options previously
awarded under the Timberland Bancorp, Inc. 1999 Stock Option Plan and the
Timberland Bancorp, Inc. 2003 Stock Option Plan in light of the new accounting
regulations (SFAS No. 123 (Revised)) that will take effect in the Company's
next fiscal year. The Board of Directors took this action with the belief
that it is the best interests of its shareholders as it will reduce the
Company's reported compensation expense in future periods. As a result of the
vesting acceleration, options to purchase approximately 27,500 shares of
Timberland Bancorp, Inc. common stock became exercisable immediately. All of
these stock options were considered out of the money since the option's
exercise price was greater than the current market value. As a result of the
vesting acceleration, the Company's footnote stock based expense under SFAS
No. 123, Accounting for Stock-Based Compensation increased by approximately
$54,000 during the quarter ended June 30, 2005.
The following table illustrates the effect on net income and earnings per
share for the three and nine months ended June 30, 2005 and 2004 if the
Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation for the effects of all options
granted:
Three Months Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
---------------------- ----------------------
Net income as reported $1,835,000 $1,446,000 $4,780,000 $4,255,000
Less total stock-based
compensation expense
determined under fair
value method for all
qualifying awards, net
of tax (75,000) (46,000) (249,000) (126,000)
Pro forma net income $1,760,000 $1,400,000 $4,531,000 $4,129,000
Earnings per share:
Basic:
As reported $ 0.54 $ 0.41 $ 1.37 $ 1.16
Pro forma 0.52 0.40 1.30 1.12
Diluted:
As reported $ 0.51 $ 0.39 $ 1.31 $ 1.10
Pro forma 0.49 0.38 1.25 1.07
11
(4) ACQUISITION
On October 9, 2004, Timberland Bank, the subsidiary of the Company completed
the acquisition of seven branch offices and related deposits of $86.3 million
("Branch Acquisition"). In addition the Bank acquired the real estate, branch
infrastructure and employees of the seven branches. The Bank paid $1.8
million for the branch buildings and fixed assets. The Bank paid a premium
for the deposits and recorded intangible assets (the excess of the purchase
price over the net fair value of the assets and liabilities acquired) in the
amount of $7.8 million. As part of the accounting for the acquisition, the
intangible assets were recorded as goodwill and core deposit intangible in the
amounts of $5.6 million and $2.2 million, respectively.
The Company will follow the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 provides that goodwill is no longer amortized
and the value of an identifiable intangible asset is amortized over its useful
life, unless the asset is determined to have an indefinite life. The Company
will review the recorded value of the goodwill on an annual basis for
impairment. The annual test for impairment will be a two-step process. The
first step will be to compare the current value of the acquired branch offices
and related deposits with the fair value on the purchase date. If the current
value exceeds the purchase value, goodwill will not be considered to be
impaired and the test is completed. If the purchase date fair value is
determined to be greater than the current value, the implied value of the
goodwill will be compared to the recorded value of the goodwill. Any noted
impairment loss will be recorded at that time.
The core deposit intangible recorded as part of the acquisition has an
estimated life of ten years and will be amortized using an accelerated method
over the ten-year period.
(5) SUBSEQUENT EVENTS
On July 19, 2005, the Company announced a quarterly cash dividend of $0.16 per
common share. The dividend is to be paid August 24, 2005, to shareholders of
record as of the close of business August 9, 2005.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123
(Revised), "Share-Based Payment" ("SFAS 123(R)"). This Statement establishes
standards for accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments, or that may be
settled by the issuance of those equity instruments. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and employee share purchase plans. SFAS No. 123(R) replaces existing
requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. For the
Company, the Statement is effective for the interim reporting period beginning
October 1, 2005. Adoption of the Statement will impact the consolidated
financial statements by requiring compensation expense to be recorded for the
unvested portion of stock options, which have been granted or which are
subsequently granted.
On September 30, 2004, the FASB issued FASB Staff Position ("FSP") Emerging
Issues Task Force ("EITF") Issue No. 03-1-1 delaying the effective date of
paragraphs 10-20 of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments", which provides guidance for
determining the meaning of "other-than-temporarily impaired" and its
application to certain debt and equity securities within the scope of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities", and
investments accounted for under the cost method. The guidance requires that
investments which have declined
12
in value as a result of credit concerns or solely as a result of changes in
interest rates must be recorded as other-than-temporarily impaired unless the
Company can assert and demonstrate its intention to hold the security for a
period of time sufficient to allow for a recovery of fair value up to or
beyond the cost of the investment which might mean maturity. The delay of the
effective date of EITF 03-1 will be superceded concurrent with the final
issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended
to provide implementation guidance with respect to all securities analyzed for
impairment under paragraphs 10-20 of EITF 03-1. Management continues to
closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP
Issue 03-1-a will affect the Company.
In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted accounting
principle. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. The
adoption of SFAS No. 154 is not expected to have a material impact on the
Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
---------------------
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, 2005. 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. The
Company's actual results, performance, or achievements may differ materially
from those suggested, expressed, or implied by forward looking statements as a
result of a wide variety or range of factors including, but not limited to:
interest rate fluctuations; economic conditions in the Company's primary
market area; deposit flows; demand for residential, commercial real estate,
consumer, and other types of loans; real estate values; success of new
products and services; and other risks detailed in the Company's reports filed
with the SEC, including its 2004 Form 10-K. Accordingly, these factors should
be considered in evaluating forward-looking statements, and undue reliance
should not be placed on such statements. The Company undertakes no
responsibility to update or revise any forward-looking statements.
Comparison of Financial Condition at June 30, 2005 and September 30, 2004
Total Assets: Total assets increased $92.46 million to $552.88 million at June
30, 2005 from $460.42 million at September 30, 2004 primarily as a result of a
$42.21 million increase in net loans receivable, a $31.86 million increase in
investment securities, a $7.58 million increase in goodwill and core deposit
intangible, a $6.85 million increase in interest bearing deposits in banks and
federal funds sold, and a $1.85 million increase in premises and equipment.
This growth was primarily funded by the net cash received in connection with
the Branch Acquisition. In October 2004, Timberland Bank purchased seven
branch offices which are located in Toledo, Winlock, Elma, Montesano, Hoquiam,
Aberdeen, and Lacey in the State of Washington. The purchase of the branches
included deposit accounts of approximately $86.30 million.
13
Cash and Due from Financial Institutions: Cash and due from financial
institutions increased to $17.39 million at June 30, 2005 from $15.27 million
at September 30, 2004.
Interest Bearing Deposits in Banks and Federal Funds Sold: Interest bearing
deposits in banks and federal funds sold increased $6.84 million to $11.41
million at June 30, 2005 from $4.57 million at September 30, 2004 as a portion
of the funds from increased deposits were placed into these liquid accounts.
Investment Securities: Investment securities increased $31.86 million to
$91.92 million at June 30, 2005 from $60.06 million at September 30, 2004.
The increase was primarily a result of investing a portion of the net cash
received in connection with the Branch Acquisition into U.S agency securities
and mortgage-backed securities. At June 30, 2005, the Company's securities'
portfolio was comprised of mutual funds of $32.33 million, mortgage-backed
securities of $25.72 million, and U.S. agency securities of $33.87 million.
The mutual funds invest primarily in mortgage-backed products and U.S. agency
securities. For additional information, see the "Investment Securities" table
included herein.
Loans: Net loans receivable increased by $42.21 million to $386.81 million at
June 30, 2005 from $344.59 million at September 30, 2004. The increase in the
portfolio was primarily a result of a $17.67 million increase in commercial
real estate loans, a $7.61 million increase in consumer loans, a $7.33 million
increase in construction loans (net of undisbursed portion), a $4.94 million
increase in one-to-four family mortgage loans, a $2.40 million increase in
land loans, a $1.70 million increase in multi-family loans, and a $493,000
increase in commercial business loans.
Loan originations totaled $58.25 million and $168.63 million for the three and
nine months ended June 30, 2005 compared to $46.91 million and $133.63 million
for the same periods a year earlier. The Bank sold loans totaling $8.30
million and $17.78 million ($16.26 million in fixed rate one-to-four family
mortgage loans and $1.52 million in credit card loans) during the three and
nine months ended June 30, 2005, compared to $10.41 million and $33.28 million
in fixed rate one-to-four family mortgage loans sold for the same periods a
year earlier.
For additional information, see the "Loan Portfolio Composition" table and the
"Construction and Land Development Loan Portfolio Composition" table included
herein.
Real Estate Owned and Other Repossessed Items: Real estate owned ("REO") and
other repossessed items decreased to $372,000 at June 30, 2005 from $421,000
at September 30, 2004 as several properties were sold and several were added.
At June 30, 2005, the REO and other repossessed item amounts were comprised of
land parcels totaling $363,000 and vehicles and other personal property
totaling $9,000. For additional information, see the "Non-Performing Assets"
table included herein.
Premises and Equipment: Premises and equipment increased $1.85 million to
$15.76 million at June 30, 2005 from $13.91 million at September 30, 2004.
This increase is primarily attributable to the Branch Acquisition. The
acquired offices are located in Toledo, Winlock, Elma, Montesano, Hoquiam,
Aberdeen and Panorama City (Lacey), Washington. Timberland acquired the real
estate for all of these offices with the exception of the facility in Panorama
City, which is leased. Subsequent to the acquisition, two of the acquired
offices (Montesano and Hoquiam) were consolidated with existing Bank branch
offices.
Goodwill and Core Deposit Intangible: The amortized value of goodwill and
core deposit intangible was $7.58 million at June 30, 2005 compared to none at
June 30, 2004. The Bank paid a premium for the $86.30 million of deposits
acquired in connection with the Branch Acquisition.
14
Deposits: Deposits increased by $88.59 million to $408.16 million at June 30,
2005 from $319.57 million at September 30, 2004, primarily as a result of the
acquisition of $86.30 million in deposits in October 2004. The $88.59 million
deposit increase is comprised of a $43.83 million increase in certificate of
deposit accounts, a $15.80 million increase in NOW checking accounts, a $13.55
million increase in savings accounts, an $8.89 million increase in
non-interest bearing accounts, and a $6.53 million increase in money market
accounts. For additional information, see "Deposit Breakdown" section
included herein.
FHLB Advances: FHLB advances increased to $67.40 million at June 30, 2005
from $65.42 million at September 30, 2004 as the Bank borrowed additional
funds for a portion of the loan portfolio growth. For additional information,
see "FHLB Advance Maturity Schedule" included herein.
Shareholders' Equity: Total shareholders' equity increased by $172,000 to
$72.99 million at June 30, 2005 from $72.82 million at September 30, 2004,
primarily as a result of net income of $4.78 million and a $675,000 increase
to additional paid in capital from the exercise of stock options and the
vesting associated with the Bank's benefit plans. Also increasing
shareholders' equity were decreases of $483,000 and $396,000 in the equity
components related to unearned shares issued to the MRDP and the ESOP,
respectively. Partially offsetting these increases to shareholders' equity
were the repurchase of 174,434 shares of the Company's stock for $4.06
million, the payment of $1.72 million in dividends to shareholders, and a
$381,000 increase in accumulated other comprehensive loss.
On April 7, 2005 the Company announced a plan to repurchase up to 5% of the
Company's outstanding shares of common stock, or 187,955 shares. This
represents the Company's 13th stock repurchase plan. As of June 30, 2005, the
Company had repurchased 27,850 of these shares at an average price of $23.16
per share. Cumulatively, the Company has repurchased 3,367,121 (50.9%) of the
6,612,500 shares that were issued when the Company went public in 1998. These
3,367,121 shares have been repurchased at an average price of $15.39 per
share. For additional information, see Item 2 of Part II of this Form 10-Q.
Non-performing Assets: The Company's non-performing asset ratio to total
asset ratio ("NPA") increased to 0.61% at June 30, 2005 from 0.40% at
September 30, 2004, as total non-performing assets increased $1.49 million to
$3.35 million from $1.86 million. The increase in non-performing assets was
primarily attributable to a $1.53 million increase in non-performing loans.
The non-performing loan total of $2.98 million at June 30, 2005 consisted of
$1.99 million in one-to-four family loans, $598,000 in commercial real estate
loans, $256,000 in commercial business loans, and $131,000 in land loans.
Despite historically having a higher percentage of non-performing loans than
the Company's relevant peer group, the Company's actual charge-offs have
remained low. The Company had a net charge-off of $4,000 during the nine
months ended June 30, 2005 and during the last five fiscal years its net
charge-offs to outstanding loans ratio has averaged less than .10% per year.
For additional information, see the "Non-Performing Assets" table and the
"Activity in the Allowance for Loan Loss" schedule included herein.
15
Investment Securities
- ---------------------
The following table sets forth the composition of the Company's investment
securities portfolio.
At June 30, At September 30,
2005 2004
Amount Percent Amount Percent
------------------ -------------------
(Dollars in thousands)
Held-to-maturity:
Mortgage-backed securities $ 127 0.14% $ 174 0.29%
Available-for-sale (at fair value)
Mortgage-backed securities 25,591 27.84 18,329 30.52
Mutual funds 32,327 35.17 32,577 54.23
U.S. agency securities 33,874 36.85 8,983 14.96
------- ------ ------- ------
Total portfolio $91,919 100.00% $60,063 100.00%
======= ====== ======= ======
16
Loan Portfolio Composition
- --------------------------
The following table sets forth the composition of the Company's loan portfolio
by type of loan as of the dates indicated.
At June 30, At September 30,
2005 2004
Amount Percent Amount Percent
-------------------- -------------------
(Dollars in thousands)
Mortgage Loans:
One-to-four family (1) $104,771 24.23% $ 99,835 25.25%
Multi family 18,858 4.36 17,160 4.34
Commercial 125,943 29.12 108,276 27.39
Construction and
land development 108,567 25.11 106,241 26.88
Land 22,291 5.16 19,895 5.03
-------- ------ -------- ------
Total mortgage loans 380,430 87.98 351,407 88.89
Consumer Loans:
Home equity and second
mortgage 30,936 7.15 23,549 5.96
Other 9,494 2.19 9,270 2.34
-------- ------ -------- ------
40,430 9.34 32,819 8.30
Commercial business loans 11,591 2.68 11,098 2.81
-------- ------ -------- ------
Total loans 432,451 100.00% 395,324 100.00%
====== ======
Less:
Undisbursed portion of
construction loans
in process (38,563) (43,563)
Unearned income (2,979) (3,176)
Allowance for loan losses (4,103) (3,991)
-------- --------
Total loans, net $386,806 $344,594
======== ========
- -------------
(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 as of the dates indicated.
At June 30, At September 30,
2005 2004
Amount Percent Amount Percent
-------------------- -------------------
(Dollars in thousands)
Custom and owner/builder const. $ 42,562 39.20% $ 43,801 41.23%
Speculative construction 28,527 26.28 22,228 20.92
Commercial real estate 24,556 22.62 25,633 24.13
Multi-family 6,896 6.35 3,352 3.15
Land development 6,026 5.55 11,227 10.57
-------- ------ -------- ------
Total construction loans $108,567 100.00% $106,241 100.00%
======== ====== ======== ======
17
Non-Performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated.
June 30, September 30,
2005 2004
-----------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family $ 1,991 $ 430
Commercial 598 640
Land 131 322
Consumer loans -- 23
Commercial business loans 256 27
-------- --------
Total 2,976 1,442
Accruing loans which are contractually
past due 90 days or more: -- --
-------- --------
Total -- --
Total of non-accrual and
90 days past due loans 2,976 1,442
Real estate owned and other
repossessed items 372 421
-------- --------
Total non-performing assets $ 3,348 $ 1,863
======== ========
Restructured loans -- --
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 0.76% 0.41%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 0.54% 0.31%
Non-performing assets as a percentage
of total assets 0.61% 0.40%
Loans receivable (1) $390,909 $348,585
======== ========
Total assets $552,879 $460,419
======== ========
- -------------
(1) Includes loans held-for-sale and is before the allowance for loan losses
18
Activity in the Allowance for Loan Losses
- -----------------------------------------
Activity in the allowance for loan losses for the nine months ended June 30,
2005 and 2004 is as follows:
2005 2004
------ ------
(In thousands)
Balance beginning of period $3,991 $3,891
Provision for loan losses 116 94
Loans charged off (14) (75)
Recoveries on loans previously charged off 10 18
Net charge offs (4) (57)
------ ------
Balance at end of period $4,103 $3,928
====== ======
19
Deposit Composition
- -------------------
The following table sets forth the balances of deposits in the various types
of accounts offered by the Bank at the dates indicated.
June 30, 2005 September 30, 2004
------------- ------------------
(in thousands) (in thousands)
Non-interest bearing $ 46,035 $ 37,150
NOW checking 93,042 77,242
Savings 61,754 48,200
Money market accounts 48,178 41,652
Certificates of deposit under $100,000 116,047 93,750
Certificates of deposit $100,000 and over 43,107 21,576
-------- --------
Total Deposits $408,163 $319,570
======== ========
FHLB Advance Maturity Schedule
- ------------------------------
The Bank's FHLB borrowings mature at various dates through January 2011 and
bear interest at rates ranging from 3.35% to 6.55%. Principal reduction
amounts due for future years ending September 30 are as follows (in
thousands):
2005 $ 5,047
2006 18,591
2007 4,064
2008 15,070
2009 4,628
Thereafter 20,000
-------
Total $67,400
=======
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
20
Comparison of Operating Results for the Three and Nine Months Ended June 30,
2005 and 2004
Net Income: Net income for the quarter ended June 30, 2005 increased to $1.84
million, or $0.51 per diluted share ($0.54 per basic share) from $1.45
million, or $0.39 per diluted share ($0.41 per basic share), for the quarter
ended June 30, 2004. The $0.12 increase in diluted earnings per share for the
quarter ended June 30, 2005 was primarily a result of an $846,000 ($558,000
net of income tax - $0.15 per diluted share) increase in net interest income
af er provision for loan losses, and a $430,000 ($284,000 net of income tax -
$0.08 per diluted share) increase in non-interest income. These items were
partially offset by a $571,000 ($377,000 net of income tax - $0.11 per diluted
share) increase in non-interest expense.
Net income for the nine months ended June 30, 2005 increased to $4.78 million,
or $1.31 per diluted share ($1.37 per basic share) from $4.26 million, or
$1.10 per diluted share ($1.16 per basic share), for the nine months ended
June 30, 2004. The $0.21 increase in diluted earnings per share for the nine
months ended June 30, 2005 was primarily the result of a $2.26 million ($1.49
million net of income tax - $0.38 per diluted share) increase in net interest
income after provision for loan losses, a $928,000 ($612,000 net of income tax
- - $0.15 per diluted share) increase in non-interest income, and a lower number
of weighted average shares outstanding which increased diluted earnings per
share by approximately $0.07. These items were partially offset by a $2.33
million ($1.54 million net of income tax - $0.40 per diluted share) increase
in non-interest expense.
Net Interest Income: Net interest income increased $928,000 to $5.81 million
for the quarter ended June 30, 2005 from $4.88 million for the quarter ended
June 30, 2004, primarily as a result of increased interest income from a
larger interest earning asset base. Total interest income increased $1.45
million to $8.04 million for the quarter ended June 30, 2005 from $6.59
million for the quarter ended June 30, 2004 as average total interest earning
assets increased by $85.13 million. The increased interest earning asset
balances were primarily a result of investing the funds received in connection
with the Branch Acquisition into loans and investment securities. Also
contributing to the increased interest income for the current quarter was an
increase in the overall yield on interest earning assets. The yield on
earning assets for the quarter ended June 30, 2005 increased to 6.56% from
6.51% for the quarter ended June 30, 2004, primarily as a result of the Bank
receiving and recognizing $128,000 in delinquent interest on a large loan that
had been on non-accrual status. Partially offsetting the increased interest
income was an increase in interest expense as average interest bearing
deposits and borrowings increased. Total interest expense increased by
$517,000 to $2.23 million for the quarter ended June 30, 2005 from $1.71
million for the quarter ended June 30, 2004 as average interest bearing
liabilities increased $86.21 million. The increased interest bearing
liabilities were primarily a result of the Branch Acquisition. Also
contributing to increased interest expense was an increase in the average rate
paid for these funding sources to 2.10% for the quarter ended June 30, 2005
from 2.03% for the quarter ended June 30, 2004. As a result of these changes,
the net interest margin decreased to 4.74% for the quarter ended June 30, 2005
from 4.82% for the quarter ended June 30, 2004.
The Company did not receive a dividend on FHLB of Seattle stock during the
quarter ended June 30, 2005 compared to dividends of $55,000 during the same
quarter a year ago. The FHLB of Seattle has been operating under a regulatory
directive since May 2005 and it has announced that all future dividends will
be suspended until its financial position and performance improves.
Net interest income increased $2.28 million to $16.60 million for the nine
months ended June 30, 2005 from $14.32 million for the nine months ended June
30, 2004, primarily as a result of increased interest income from a larger
interest earning asset base. Total interest income increased $2.87 million to
$22.77 million for the nine months ended June 30, 2005 from $19.90 million for
the nine months ended June 30, 2004 as average total interest earning assets
increased by $65.25 million. The increased interest earning asset balances
were a result of investing the funds received in connection with the Branch
Acquisition. The increased interest earning
21
balances were partially offset by a reduction in the yield on assets. The
yield on earning assets decreased to 6.33% for the nine months ended June 30,
2005 from 6.40% for the nine months ended June 30, 2004. Also partially
offsetting the increased interest income was an increase in interest expense
as average interest bearing deposits and borrowings increased. Total
interest expense increased by $584,000 to $6.17 million for the nine months
ended June 30, 2005 from $5.58 million for the nine months ended June 30, 2004
as average interest bearing liabilities increased $71.16 million. As a
result of these changes the net interest margin increased to 4.62% for the
nine months ended June 30, 2005 from 4.61% for the nine months ended June 30,
2004.
Provision for Loan Losses: The provision for loan losses increased to $96,000
for the quarter ended June 30, 2005 from $14,000 for the quarter ended June
30, 2004. The provision for the nine months ended June 30, 2005 increased to
$116,000 from $94,000 for the nine months ended June 30, 2004. On a quarterly
basis the Bank performs a comprehensive analysis taking into consideration
historic loss experience for various loan segments, collateral securing
individual loans on non-accrual status, changes in economic conditions,
delinquency rates, and other factors to determine the level of allowance for
loan losses.
Based on its comprehensive analysis, management deemed the allowance for loan
losses of $4.10 million at June 30, 2005 (1.05% of loans receivable and
137.87% of non-performing loans) adequate to provide for probable losses based
on an evaluation of known and inherent risks in the loan portfolio at that
date. The allowance for loan losses was $3.93 million (1.16% of loans
receivable and 186.25% of non-performing loans) at June 30, 2004. The Company
did not have any net charge-offs during the current quarter compared to a net
charge-off of $14,000 in the same quarter of 2004. For the nine months ended
June 30, 2005 and 2004, net charge-offs were $4,000 and $57,000, respectively.
For additional information, see the "Activity in the Allowance for Loan
Losses" table included herein.
Non-interest Income: Total non-interest income increased $430,000 to $1.55
million for the quarter ended June 30, 2005 from $1.12 million for the quarter
ended June 30, 2004, primarily as a result of a $213,000 increase in service
charges on deposits, a $114,000 increase in income from loan sales (gain on
sale of loans and servicing income on loans sold), and a $57,000 increase in
ATM transaction fees. The increased service charges on deposits and the
increased ATM transaction fees were primarily a result of the increased
transaction account base acquired through the Branch Acquisition.
Total non-interest income increased by $928,000 to $4.43 million for the nine
months ended June 30, 2005 from $3.50 million for the nine months ended June
30, 2004, primarily as a result of a $653,000 increase in service charges on
deposits, a $170,000 increase in ATM transaction fees, and an $81,000
distribution from one of the Bank's ATM network associations. The ATM network
association distribution was cash consideration paid to network association
members in connection with the association's merger.
Non-interest Expense: Total non-interest expense increased by $571,000 to
$4.47 million for the quarter ended June 30, 2005 from $3.89 million for the
quarter ended June 30, 2004, as the Bank operated with a larger branch network
as a result of the Branch Acquisition and the associated employees. The
increase was primarily a result of a $373,000 increase in salaries and
employee benefits, a $171,000 increase in premises and equipment expenses, and
a $94,000 core deposit intangible amortization expense. The increased
employee expenses were primarily attributable to the larger employee base
resulting from the Branch Acquisition, annual salary adjustments, and
increased medical insurance costs.
The Company's efficiency ratio improved to 60.69% for the quarter ended June
30, 2005 from 64.91% for the quarter ended June 30, 2004. The improved ratio
was primarily attributable to increased net interest income and increased
non-interest income. Effective August 1, 2005 expenses will be reduced by
$55,000 per month ($660,000 per year pre-tax) due to the elimination of the
expense associated with the MRDP.
22
The Company also announced that it expects to incur additional expenses
associated with Sarbanes-Oxley internal control documentation requirements.
During the quarter ending September 30, 2005, these expenses are projected to
range from $125,000 to $150,000 as testing and independent audit procedures
are performed in preparation for the Company's September 30, 2005 fiscal year
end.
Total non-interest expense increased by $2.33 million to $13.90 million for
the nine months ended June 30, 2005 from $11.56 million for the nine months
ended June 30, 2004. The increase was primarily a result of a $1.17 million
increase in salaries and employee benefits, a $322,000 increase in premises
and equipment expenses, a $273,000 core deposit intangible expense, $142,000
in expenses associated with the Branch Acquisition, a $109,000 increase in
postage and courier expense, and a $47,000 increase in ATM operating fees.
The Company's efficiency ratio increased to 66.08% for the nine months ended
June 30, 2005 from 64.90% for the nine months ended June 30, 2004. The
increased ratio resulted primarily from the Branch Acquistion.
Provision for Income Taxes: The provision for income taxes increased to
$961,000 and $2.24 million for the three and nine months ended June 30, 2005
from $645,000 and $1.90 million for the three and nine months ended June 30,
2004. The increased tax provision was primarily attributable to increased
income before taxes. The Company's effective tax rate was 31.9% for the nine
months ended June 30, 2005 and 30.9% for the nine months ended June 30, 2004.
The increase in the effective tax rate was primarily a result of a decrease in
the percentage of tax exempt income during the current year and tax
adjustments relating to the Company's Branch Acquisition.
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.
An analysis of liquidity should also include a review of the changes that
appear in the condensed consolidated statement of cash flows for the nine
months ended June 30, 2005. This statement 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
proceeds from maturities and sales of securities, purchases of securities, and
the net change in loans. Financing activities present the cash flows
associated with the Company's deposit accounts, other borrowings and stock
related transactions.
The Company's total of cash and due from financial institutions, interest
bearing deposits in banks, and federal funds sold increased by $8.97 million
to $28.80 million at June 30, 2005 from $19.83 million at September 30, 2004.
The Company's liquid assets increased primarily as a result of increased
deposits.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds for 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, 2005,
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
13.99%. The Bank also maintained an uncommitted credit facility with the
FHLB-Seattle that provided for immediately available
23
advances up to an aggregate amount of $139.24 million, under which $67.40
million was outstanding at June 30, 2005.
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, federal funds sold, and other short-term
investments. 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, 2005, the Bank had loan commitments totaling
$28.27 million and undisbursed loans in process totaling $38.56 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, 2005 totaled $110.84 million. Historically,
the Bank has been able to retain a significant amount of its certificates of
deposit as they mature.
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At June 30, 2005, the Bank was in compliance with all applicable
capital requirements.
Regulatory Capital
- ------------------
The following table compares the Bank's regulatory capital at June 30, 2005 to
its minimum regulatory capital requirements at that date (dollars in
thousands):
Percent of
Amount Adjusted Total Assets(1)
------ ------------------------
Tier 1 (leverage) capital $58,227 10.9%
Tier 1 (leverage) capital requirement 21,349 4.0
------- ----
Excess $36,878 6.9%
======= ====
Tier 1 risk adjusted capital $58,227 14.8%
Tier 1 risk adjusted capital requirement 15,791 4.0
------- ----
Excess $42,436 10.8%
======= ====
Total risk based capital $62,330 15.8%
Total risk based capital requirement 31,583 8.0
------- ----
Excess $30,747 7.8%
======= ====
- --------------
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$533.73 million. For the Tier 1 risk-based capital and total risk-based
capital calculations, percent of total risk-weighted assets of $ 394.78
million.
24
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
----------------- -----------------
PERFORMANCE RATIOS:
Return on average assets (1) 1.35% 1.31% 1.20% 1.26%
Return on average equity (1) 10.19% 8.11% 8.77% 7.51%
Net interest margin (1) (2) 4.74% 4.82% 4.62% 4.61%
Efficiency ratio 60.69% 64.91% 66.08% 64.90%
June 30, September 30,
2005 2004
------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 2,976 $ 1,442
REO and other repossessed assets 372 421
-------- --------
Total non-performing assets $ 3,348 $ 1,863
-------- --------
Non-performing assets to total assets 0.61% 0.40%
Allowance for loan losses to
non-performing loans 137.87% 276.77%
Book Value Per Share (3) $ 19.52 $ 18.76
Book Value Per Share (4) 21.01 20.28
Tangible Book Value Per Share (3) (5) 17.50 18.76
Tangible Book Value Per Share (4) (5) 18.83 20.28
- ----------
(1) Annualized
(2) Certain prior period amounts have been reclassified between interest
income and servicing income on loans sold to conform to the June 30, 2005
presentation.
(3) Calculation includes ESOP shares not committed to be released
(4) Calculation excludes ESOP shares not committed to be released
(5) Calculation subtracts goodwill and core deposit intangible from the
equity component
Three Months Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
----------------- -----------------
AVERAGE BALANCE SHEET:
Average total loans $385,592 $338,215 $372,183 $338,497
Average total interest
earning assets 490,359 405,227 479,551 414,298
Average total assets 544,149 442,653 532,025 451,039
Average total interest
bearing deposits 355,367 281,993 353,622 284,127
Average FHLB advances and
other borrowings 68,345 55,512 59,455 57,786
Average shareholders' equity 72,027 71,344 72,708 75,541
25
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, 2004.
Item 4. Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)) of
the Securities Exchange Act of 1934 (the "Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive
Officer, Chief Financial Officer and several other members of the Company's
senior management as of the end of the period covered by this report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated
and communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2005, the
Company did not make any significant changes in, nor take any material
corrective actions regarding, its internal controls or other factors that
could significantly affect these controls. A number of internal control
procedures were, however, modified during the quarter to improve internal
controls. The Company also continued to implement suggestions from its
internal auditor and independent auditor on ways to strengthen existing
controls. The Company does not expect that its disclosure controls and
procedures and internal controls over financial reporting will prevent all
error and fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
in controls or procedures can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any control procedure is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control procedure, misstatements due to error or fraud may
occur and not be detected.
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. Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
26
The following table sets forth the shares repurchased by the Company during
the quarter:
Period Total No. of Average Total No. of Maximum No.
Shares Price Shares Purchased of Shares
Purchased Paid as Part of that May Yet
per Share Publicly Be Purchased
Announced Plan(1) Under the Plan
- --------------- ------------ --------- ----------------- --------------
04/01/2005 -
04/30/2005 -- $ -- -- 187,955
05/01/2005 -
05/31/2005 20,850 23.19 20,850 167,105
06/01/2005 -
06/30/2005 7,000 23.05 7,000 160,105
------ ------- ------
Total 27,850 $ 23.16 27,850
====== ======= ======
- ----------
(1) On April 7, 2005 the Company announced a plan to repurchase up to 5% of
the Company's outstanding shares of common stock, or 187,955 shares. As of
June 30, 2005, the Company had repurchased 27,850 of these shares.
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
- ------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
3.3 Amendment to Bylaws (2)
10.1 Employee Severance Compensation Plan (3)
10.2 Employee Stock Ownership Plan (3)
10.3 1999 Stock Option Plan (4)
10.4 Management Recognition and Development Plan (4)
10.5 2003 Stock Option Plan (5)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley Act
27
-----------
(1) Incorporated by reference to the Registrant's Registration Statement
of Form S-1 (333- 35817).
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended September 30, 2002.
(3) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997.
(4) Incorporated by reference to Exhibit 99 included in the Registrant's
Registration Statement on Form S-8 (333-32386)
(5) Incorporated by reference to Exhibit 99.2 included in the
Registrant's Registration Statement on Form S-8 (333-1161163)
28
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 5, 2005 By: /s/Michael R. Sand
-----------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 2005 By: /s/Dean J. Brydon
-----------------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
29
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes Oxley Act
I, Michael R. Sand, certify that:
1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are likely to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 5, 2005 /s/ Michael R. Sand
-----------------------
Michael R. Sand
Chief Executive Officer
30
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes Oxley Act
I, Dean J. Brydon, certify that:
1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are likely to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 5, 2005 /s/ Dean J. Brydon
-----------------------
Dean J. Brydon
Chief Financial Officer
31
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
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/ Michael R. Sand /s/Dean J. Brydon
---------------------------- -----------------------------
Michael R. Sand Dean J. Brydon
Chief Executive Officer Chief Financial Officer
Date: August 5, 2005
32