UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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 98550
(Address of principal executive office) (Zip Code)
(360) 533-4747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Check
one:
Large accelerated filer Accelerated Filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (in Rule
12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT APRIL 30, 2006
----- ------------------------------------
Common stock, $.01 par value 3,775,437
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 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28-29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 30
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2006 and September 30, 2005
In Thousands, Except Share Amounts
March 31, September 30,
2006 2005
--------------------------
Assets (Unaudited)
Cash and due from financial institutions
Non-interest bearing $ 18,650 $ 20,015
Interest bearing deposits in banks 1,872 3,068
Federal funds sold 10,770 5,635
--------- ---------
31,292 28,718
Investments and mortgage-backed securities:
Held to maturity 89 104
Available for sale 86,657 89,595
Federal Home Loan Bank ("FHLB") stock 5,705 5,705
--------- ---------
92,451 95,404
Loans receivable 397,216 389,853
Loans held for sale 140 2,355
Less: Allowance for loan losses (4,119) (4,099)
--------- ---------
Total Loans 393,237 388,109
--------- ---------
Accrued interest receivable 2,558 2,294
Premises and equipment 15,933 15,862
Other real estate owned and other repossessed items 110 509
Bank owned life insurance ("BOLI") 11,723 11,502
Goodwill 5,650 5,650
Core deposit intangible 1,670 1,834
Mortgage servicing rights 913 928
Other assets 1,846 1,955
--------- ---------
Total Assets $ 557,383 $ 552,765
--------- ---------
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 414,035 $ 411,665
FHLB advances 61,792 62,353
Other borrowings: repurchase agreements 838 781
Other liabilities and accrued expenses 3,005 3,324
--------- ---------
Total Liabilities 479,670 478,123
--------- ---------
Shareholders' Equity
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued
Common Stock, $.01 par value; 50,000,000 shares
authorized;
March 31, 2006 - 3,774,337 shares issued and
outstanding
September 30, 2005 - 3,759,937 shares issued
and outstanding 38 38
Additional paid in capital 22,391 22,040
Unearned shares - Employee Stock Ownership
Plan ("ESOP") (3,569) (3,833)
Retained earnings 60,016 57,268
Accumulated other comprehensive loss (1,163) (871)
--------- ---------
Total Shareholders' Equity 77,713 74,642
--------- ---------
Total Liabilities and Shareholders' Equity $ 557,383 $ 552,765
--------- ---------
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended March 31, 2006 and 2005
Dollars in Thousands, Except Per Share Amounts
(unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
------------------ -------------------
Interest and Dividend Income
Loans receivable $ 7,624 $ 6,594 $15,108 $13,101
Investments and mortgage-backed
securities 576 520 1,113 910
Dividends from investments 342 251 665 517
Federal funds sold 95 50 172 162
Interest bearing deposits in banks 12 15 36 43
------------------ -------------------
Total interest and dividend income 8,649 7,430 17,094 14,733
Interest Expense
Deposits 1,809 1,257 3,497 2,437
FHLB advances 762 737 1,482 1,486
Other borrowings 16 10 26 15
------------------ -------------------
Total interest expense 2,587 2,004 5,005 3,938
------------------ -------------------
Net interest income 6,062 5,426 12,089 10,795
Provision for loan losses -- 20 -- 20
------------------ -------------------
Net interest income after
provision for loan losses 6,062 5,406 12,089 10,775
Non-Interest Income
Service charges on deposits 737 642 1,457 1,339
Gain on sale of loans, net 88 84 204 432
BOLI net earnings 111 110 221 209
Escrow fees 24 24 55 59
Servicing income on loans sold 78 49 186 88
ATM transaction fees 240 213 476 410
Other 231 218 465 341
------------------ -------------------
Total non-interest income 1,509 1,340 3,064 2,878
Non-Interest Expense
Salaries and employee benefits 2,737 2,548 5,367 5,198
Premises and equipment 631 566 1,239 1,077
Advertising 179 212 315 377
Loss (gain) from real estate
operations (39) (3) (91) (30)
ATM expenses 97 103 194 216
Postage and courier 132 143 247 301
Amortization of core deposit
intangible 82 94 164 179
State and local taxes 128 111 288 206
Professional fees 181 177 389 362
Other 591 720 1,243 1,545
------------------ -------------------
Total non-interest expense 4,719 4,671 9,355 9,431
Income before federal income taxes 2,852 2,075 5,798 4,222
Federal income taxes 906 624 1,846 1,277
------------------ -------------------
Net Income $ 1,946 $ 1,451 $ 3,952 $ 2,945
================== ===================
Earnings Per Common Share:
Basic $0.55 $0.42 $1.13 $0.84
Diluted $0.53 $0.40 $1.09 $0.80
Weighted average shares outstanding:
Basic 3,511,880 3,488,385 3,508,163 3,522,062
Diluted 3,640,612 3,644,604 3,633,034 3,681,282
Dividends per share: $0.16 $0.15 $0.32 $0.30
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, 2005 and the six months ended March 31, 2006
In Thousands, Except Common Stock Shares
Unearned
Unearned Shares Accumu-
Shares Issued to lated
Issued to Manage- Other
Employee ment Compre-
Common Common Additional Stock Recog- hensive
Stock Shares Stock Paid-In Ownership nition Retained Income
Outstanding Amount Capital Trust Plan Earnings (Loss) Total
----------- ------- -------- --------- ------ -------- ------ ---------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, Sept. 30, 2004 3,882,070 $39 $24,867 ($4,362) ($537) $52,967 ($157) $72,817
Net income - - - - - - - - - - 6,618 - - 6,618
Repurchase of
common stock (174,434) (2) (4,062) - - - - - - - - (4,064)
Exercise of stock options 52,301 1 813 - - - - - - - - 814
Cash dividends
($.61 per share) - - - - - - - - - - (2,317) - - (2,317)
Earned ESOP shares - - 293 529 - - - - - - 822
Earned MRDP shares (1) - - 129 - - 537 - - - - 666
Change in fair value of
securities available
for sale, net of tax - - - - - - - - - - - - (714) (714)
Balance, Sept. 30, 2005 3,759,937 38 22,040 (3,833) - - 57,268 (871) 74,642
(Unaudited)
Net income - - - - - - - - - - 3,952 - - 3,952
Repurchase of
common stock (8,200) - - (193) - - - - - - - - (193)
Exercise of stock options 22,600 - - 366 - - - - - - - - 366
Cash dividends
($.32 per share) - - - - - - - - - - (1,204) - - (1,204)
Earned ESOP shares - - - - 167 264 - - - - - - 431
Stock option compensation
expense - - - - 11 - - - - - - - - 11
Change in fair value of
securities available
for sale, net of tax - - - - - - - - - - - - (292) (292)
Balance, March 31, 2006 3,774,337 $38 $22,391 ($3,569) $- - $60,016 ($1,163) $77,713
(1) Shares issued under the Timberland Bancorp, Inc. Management Recognition and Development Plan ("MRDP")
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2006 and 2005
In Thousands
(unaudited)
Six Months
Ended March 31,
2006 2005
Cash Flow from Operating Activities ---------------------
Net income $3,952 $2,945
Noncash revenues, expenses, gains and
losses included in income:
Depreciation 518 465
Amortization of core deposit intangible 164 181
FHLB stock dividends - - (23)
Earned ESOP Shares 431 415
Earned MRDP Shares - - 331
Stock option compensation expense 11 - -
Gain on sale of other real estate owned, net (49) (40)
Loss on sale of premises and equipment - - 13
BOLI cash surrender value increase (221) (209)
Gain on sale of loans (204) (432)
Decrease in deferred loan origination fees (208) (3)
Provision for loan and other real estate owned losses - - 45
Loans originated for sale (10,635) (4,022)
Proceeds from sale of loans 13,054 5,064
(Increase) decrease in other assets, net 42 (100)
Decrease in other liabilities and accrued expenses, net (319) (338)
---------------------
Net Cash Provided by Operating Activities 6,536 4,292
Cash Flow from Investing Activities
Purchase of securities available for sale - - (38,973)
Proceeds from maturities of securities available
for sale 2,485 4,982
Proceeds from maturities of securities held to maturity 14 27
Increase in loans receivable, net (7,179) (33,966)
Additions to premises and equipment (589) (385)
Purchase of branches, net of cash and cash equivalents - - 76,630
Proceeds from the disposition of premises and equipment - - 6
Proceeds from sale of other real estate owned 472 350
---------------------
Net Cash Provided by (Used in) Investing Activities (4,797) 8,671
Cash Flow from Financing Activities
Increase (decrease) in deposits, net 2,370 (6,123)
Net decrease in FHLB advances - long term (5,561) (4,489)
Net increase (decrease) in FHLB advances - short term 5,000 (1,485)
Increase in repurchase agreements 57 1,472
Proceeds from exercise of stock options 366 346
Purchase and retirement of common stock (193) (3,420)
Payment of dividends (1,204) (1,150)
---------------------
Net Cash Provided by (Used in) Financing Activities 835 (14,849)
See notes to unaudited condensed
consolidated financial statements (continued)
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the six months ended March 31, 2006 and 2005
In Thousands
(unaudited)
Six Months
Ended March 31,
2006 2005
---------------------
Net Increase (Decrease) in Cash 2,574 (1,886)
Cash and Due from Financial Institutions
Beginning of period 28,718 19,833
---------------------
End of period $ 31,292 $ 17,947
---------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 1,495 $ 930
Interest paid 4,877 3,828
Supplemental Disclosure of Non-cash Investing Activities
Market value adjustment of securities held for sale,
net of tax (292) (592)
Loans transferred to other real estate owned 24 233
Supplemental Disclosure of Branch Purchase
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 purchase - - 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 six months ended March 31, 2006 and 2005
In Thousands
(unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
------------------ ------------------
Comprehensive Income:
Net Income $1,946 $1,451 $3,952 $2,945
Change in fair value of securities
available for sale, net of tax (96) (438) (292) (592)
------------------ ------------------
Total Comprehensive Income $1,850 $1,013 $3,660 $2,353
================== ==================
See notes to unaudited condensed consolidated financial statements
8
Timberland Bancorp, Inc. and Subsidiaries
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 Company's Annual Report on Form 10-K for the year ended September 30,
2005 ("2005 Form 10-K"). The results of operations for the three and six
months ended March 31, 2006 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 March 31, 2006
presentation. There was no change to net income or shareholders' equity
previously reported.
(2) EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed by dividing
net income 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
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 ESOP that have not been allocated are not considered to be outstanding
for the purpose of computing earnings per share. At March 31, 2006 and 2005,
there were 255,682 and 290,949 ESOP shares, respectively, that had not been
allocated.
9
Three Months Six Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
------------------------ ------------------------
Basic EPS computation
Numerator - Net income $ 1,946,000 $ 1,451,000 $ 3,952,000 $ 2,945,000
Denominator - Weighted
average common shares
outstanding 3,511,880 3,488,385 3,508,163 3,522,062
----------- ----------- ----------- -----------
Basic EPS $ 0.55 $ 0.42 $ 1.13 $ 0.84
Diluted EPS computation
Numerator - Net income $ 1,946,000 $ 1,451,000 $ 3,952,000 $ 2,945,000
Denominator - Weighted
average common shares
outstanding 3,511,880 3,488,385 3,508,163 3,522,062
Effect of dilutive stock
options 128,732 133,594 124,871 139,865
Effect of dilutive MRDP - - 22,625 - - 19,355
----------- ----------- ----------- -----------
Weighted average common
shares and common stock
equivalents 3,640,612 3,644,604 3,633,034 3,681,282
----------- ----------- ----------- -----------
Diluted EPS $ 0.53 $ 0.40 $ 1.09 $ 0.80
(3) STOCK BASED COMPENSATION
Prior to October 1, 2005, the Company accounted for stock-based compensation
expense using the intrinsic value method as required by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
as permitted by Statement of Financial Accounting Standards ("SFAS" or
"Statement") No. 123, "Accounting for Stock-Based Compensation." No
compensation cost for stock options was reflected in net income for the fiscal
year ended September 30, 2005, as all options granted had an exercise price
equal to the market price of the underlying common stock at the date of the
grant.
On October 1, 2005, the Company adopted SFAS No. 123(R) (revised version of
SFAS No. 123) which requires measurement of the compensation cost for all
stock-based awards based on the grant-date fair value and recognition of
compensation cost over the service period of stock-based awards. The fair
value of stock options is determined using the Black-Scholes valuation model,
which is consistent with the Company's valuation methodology previously
utilized for options in footnote disclosures required under SFAS No. 123. The
Company has adopted SFAS No. 123(R) using the modified prospective method,
which provides for no restatement of prior periods and no cumulative
adjustment to equity accounts. It also provides for expense recognition, for
both new and existing stock-based awards.
(4) STOCK COMPENSATION PLANS
Stock Option Plans
- ------------------
Under the Company's stock option plans (1999 Stock Option Plan and 2003 Stock
Option Plan), the Company may grant options for up to a combined total of
811,250 shares of common stock to certain key employees and directors. The
exercise price of each option equals the fair market value of the Company's
common stock on the date of grant. An option's maximum term is ten years.
Options vest in annual installments 10% on each of the ten anniversaries from
the date of the grant. If the Company meets three of four established
performance criteria the vesting is accelerated to 20% for that year. These
four performance criteria are: (i) generating a return on assets which exceeds
that of the median of all thrifts in the 12th FHLB District having assets
within $250 million of the Company; (ii) generating an efficiency ratio which
is less than that of the median of all thrifts in the 12th FHLB District
having assets within $250 million of the Company; (iii) generating a net
interest
10
margin which exceeds the median of all thrifts in the 12th FHLB District
having assets within $250 million of the Company; and (iv) increasing the
Company's earnings per share over the prior fiscal year. The Company performs
the accelerated vesting analysis in February of each year based on the results
of the most recently completed fiscal year. The Company met all four of the
performance criteria items for the year ended September 30, 2005. At March
31, 2006, options for 139,208 shares are available for future grant under
these plans.
Following is activity under the plans:
Six Months Ended
March 31, 2006
Total Options Outstanding
--------------------------
Weighted Weighted
Average Average
Exercise Fair
Shares Price Value
------ ------ ------
Options outstanding, beginning of period 362,411 $13.86 $3.58
Exercised (22,600) 12.16 3.29
Granted -- -- --
Options outstanding, end of period 339,811 $13.98 $3.60
-------
Options exercisable, end of period 308,639 $13.69 $3.55
Six Months Ended
March 31, 2005
Total Options Outstanding
--------------------------
Weighted Weighted
Average Average
Exercise Fair
Shares Price Value
------ ------ ------
Options outstanding, beginning of period 414,712 $13.86 $3.54
Exercised (23,633) 12.00 3.25
Granted -- -- --
-------
Options outstanding, end of period 391,079 $13.73 $3.56
Options exercisable, end of period 320,400 $12.51 $3.34
The aggregate intrinsic value of all options outstanding at March 31, 2006 was
$4.83 million. The aggregate intrinsic value of all options that were
exercisable at March 31, 2006 was $4.48 million. The aggregate intrinsic
value of all options outstanding at March 31, 2005 was $3.28 million. The
aggregate intrinsic value of all options that were exercisable at March 31,
2005 was $3.07 million.
Six Months Ended March 31,
Total Unvested Options
--------------------------
2006 2005 .
------------------- -------------------
Weighted Weighted
Average Average
Grant Grant
Date Date
Fair Fair
Shares Value Shares Value
----------------------------------------
Unvested options, beginning
of period 38,840 $4.17 77,346 $4.57
Vested (7,668) 4.31 (6,667) 4.71
Granted -- -- -- --
------ ------
Unvested options, end of period 31,172 $4.13 70,679 $4.56
The total fair value of options vested during the six months ended March 31,
2006 was $33,000. The total fair value of options vested during the six
months ended March 31, 2005 was $31,000.
11
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Six Months Ended
March 31,
---------
(In Thousands)
2006 2005
---- ----
Proceeds from options exercised $274 $239
Related tax benefit recognized 92 84
Intrinsic value of options exercised 272 247
Options outstanding at March 31, 2006 were as follows:
Outstanding Exercisable
----------------------------- -------------------------------
Weighted Weighted
Weighted Average Weighted Average
Range Average Remaining Average Remaining
Exercise Exercise Contractual Exercise Contractual
Prices Shares Price Life (Years) Shares Price Life (Years)
- ------------ ------ ----- ----------- ------ ----- -----------
$12.00-12.38 236,294 $12.01 2.9 235,794 $12.01 2.9
13.59-14.90 33,339 14.70 5.3 23,337 14.70 5.3
15.20-15.96 11,000 15.54 6.0 4,500 15.34 5.8
19.05 28,340 19.05 6.9 14,170 19.05 6.9
22.92-23.25 30,838 23.06 7.8 30,838 23.06 7.8
------- -------
339,811 $13.98 4.0 308,639 $13.69 3.8
Options outstanding at March 31, 2005 were as follows:
Outstanding Exercisable
----------------------------- -------------------------------
Weighted Weighted
Weighted Average Weighted Average
Range Average Remaining Average Remaining
Exercise Exercise Contractual Exercise Contractual
Prices Shares Price Life (Years) Shares Price Life (Years)
- ------------ ------ ----- ----------- ------ ----- -----------
$12.00-12.38 286,562 $12.01 3.9 285,062 $12.01 3.9
13.59-14.90 33,339 14.70 6.3 20,003 14.70 6.3
15.20-15.96 12,000 15.54 7.0 3,500 15.35 6.8
19.05 28,340 19.05 7.9 8,502 19.05 7.9
22.92-23.25 30,838 23.06 8.8 3,333 23.06 8.8
------- -------
391,079 $13.98 4.8 320,400 $13.69 4.8
The fair value of stock-based awards to employees and directors is calculated
using the Black-Scholes option pricing model. There were no options granted
during the six months ended March 31, 2006 and March 31, 2005.
12
Stock Grant Plans
- -----------------
The Company adopted the MRDP in 1998, which was subsequently approved by
shareholders in 1999 for the benefit of officers, employees and non-employee
directors of the Company. The objective of the MRDP is to retain personnel of
experience and ability in key positions by providing them with a proprietary
interest in the Company.
The MRDP allows for the issuance to participants of up to 264,500 shares of
the Company's common stock. The Company awarded 204,927 shares under the MRDP
to officers and directors in 2001. No shares have been awarded since 2001.
Awards under the MRDP were made in the form of restricted shares of common
stock that were subject to restrictions on the transfer of ownership.
Compensation expense in the amount of the fair value of the common stock at
the date of the grant to the plan participants was recognized over a five-year
vesting period, with 20% vesting immediately upon grant. At March 31, 2006,
participants were fully vested in all shares awarded. There was no activity
during the three and six months ended March 31, 2006 related to MRDP shares.
Expenses for Stock Compensation Plans
- -------------------------------------
Compensation expenses for all stock-based plans were as follows:
Six Months Ended March 31,
2006 2005
----------------------------
(In Thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized
in income $ 11 $ -- $ -- $ 335
Related tax benefit recognized 4 -- -- 114
The compensation expense yet to be recognized for stock based awards that have
been awarded but not vested for the years ending September 30 is as follows
(in thousands):
Stock Stock Total
Options Grants Awards
------- ------ ------
Remainder of 2006 $ 11 $ -- $ 11
2007 16 -- 16
2008 12 -- 12
2009 7 -- 7
2010 4 -- 4
2011 2 -- 2
---- ---- ----
Total $ 52 $ -- $ 52
(5) DIVIDEND / SUBSEQUENT EVENT
On April 27, 2006, the Company announced a quarterly cash dividend of $0.16
per common share, payable May 23, 2006, to shareholders of record as of the
close of business May 9, 2006.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No. 156, Accounting for Servicing of Financial Assets ("SFAS No.
156"). SFAS No. 156 amends Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, to require
all separately
13
recognized servicing assets and servicing liabilities to be initially measured
at fair value, if practicable. SFAS No. 156 also permits servicers to
subsequently measure each separate class of servicing assets and liabilities
at fair value rather than at the lower of cost or market. For those companies
that elect to measure their servicing assets and liabilities at fair value,
SFAS No. 156 requires the difference between the carrying value and fair value
at the date of adoption to be recognized as a cumulative effect adjustment to
retained earnings as of the beginning of the fiscal year in which the election
is made. The Company will adopt SFAS No. 156 beginning in the first quarter
of 2007. The Company is currently assessing the impact of adopting SFAS No.
156 but does not expect the standard to have a material impact on the
Company's consolidated financial statements.
In February 2006, FASB issued FASB Staff Position ("FSP") No. 123R-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a
Contingent Event." This staff position addresses the classification of
options and similar instruments issued as employee compensation that allow for
cash settlement upon the occurrence of a contingent event. FSP No. 123R-4
provides that cash settlement features that can be exercised only upon the
occurrence of a contingent event that is outside the employee's control does
not require classifying the option or similar instrument as a liability until
it becomes probable that the event will occur. The Company implemented the
guidance of FSP No. 123R-4 in the first quarter of fiscal year 2006.
On December 16, 2004, FASB 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." Adoption of the Statement impacts
the consolidated financial statements by requiring compensation expense to be
recorded for the unvested portion of stock options, which have been granted or
are subsequently granted. This Statement became effective for the Company on
October 1, 2005.
In May 2005, FASB issued SFAS No. 154, "Accounting Changes for Error
Corrections (SFAS No. 154)." SFAS No. 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It
established, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of
explicit transaction requirements specific to the newly adopted accounting
principle. SFAS No. 154 is effective for accounting changes and corrections
of errors made in the fiscal years ending 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 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
six months ended March 31, 2006. This analysis as well as other sections of
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
14
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 2005 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.
Overview
Timberland Bancorp, Inc. ("Company"), a Washington corporation, was organized
on September 8, 1997 for the purpose of becoming the holding company for
Timberland Savings Bank, SSB ("Bank") upon the Bank's conversion from a
Washington-chartered mutual savings bank to a Washington-chartered stock
savings bank ("Conversion"). The Conversion was completed on January 12, 1998
through the sale and issuance of 6,612,500 shares of common stock by the
Company. At March 31, 2006, the Company had total assets of $557.38 million
and total shareholders' equity of $77.71 million. The Company's business
activities generally are limited to passive investment activities and
oversight of its investment in the Bank. Accordingly, the information set
forth in this report relates primarily to the Bank.
The Bank was established in 1915 as "Southwest Washington Savings and Loan
Association." In 1935, the Bank converted from a state-chartered mutual
savings and loan association to a federally-chartered mutual savings and loan
association, and in 1972 changed its name to "Timberland Federal Savings and
Loan Association." In 1990, the Bank converted to a federally chartered
mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991,
the Bank converted to a Washington-chartered mutual savings bank and changed
its name to "Timberland Savings Bank, SSB." On December 29, 2000, the Bank
changed its name to "Timberland Bank." The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to applicable legal limits
under the Savings Association Insurance Fund. The Bank has been a member of
the Federal Home Loan Bank ("FHLB") System since 1937. The Bank is regulated
by the Washington Department of Financial Institutions, Division of Banks and
the FDIC.
The Bank is a community-oriented bank which has traditionally offered a
variety of savings products to its customers while concentrating its lending
activities on real estate mortgage loans. The Bank operates 21 branches
(including its main office in Hoquiam) in the following market areas:
* Grays Harbor County
* Thurston County
* Pierce County
* King County
* Kitsap County
* Lewis County
Critical Accounting Policies and Estimates
The Company has identified two accounting policies, that as a result of
judgments, estimates and assumptions inherent in those policies, are critical
to an understanding of the Company's Consolidated Financial Statements.
Allowance for loan losses. The allowance for loan losses is maintained at a
level sufficient to provide for probable loan losses based on evaluating known
and inherent risks in the portfolio. The allowance is based upon management's
comprehensive analysis of the pertinent factors underlying the quality of the
loan portfolio.
15
These factors include changes in the size and composition of the loan
portfolio, actual loss experience, current economic conditions, and detailed
analysis of individual loans for which the full collectibility may not be
assured. The detailed analysis includes methods to estimate the fair value of
loan collateral and the existence of potential alternative sources of
repayment. The appropriate allowance for loan loss level is estimated based
upon factors and trends identified by management at the time consolidated
financial statements are prepared.
Mortgage Servicing Rights. Mortgage servicing rights ("MSRs") are capitalized
when acquired through the origination of loans that are subsequently sold with
servicing rights retained and are amortized as an offset to servicing income
on loans sold in proportion to and over the period of estimated net servicing
income. The value of MSRs at the date of the sale of loans is determined
based on the discounted present value of expected future cash flows using key
assumptions for servicing income and costs and prepayment rates on the
underlying loans. The estimated fair value is periodically evaluated for
impairment by comparing actual cash flows and estimated cash flows from the
servicing assets to those estimated at the time servicing assets were
originated. The effect of changes in market interest rates on estimated rates
of loan prepayments represents the predominant risk characteristic underlying
the MSR portfolio. The Company's methodology for estimating the fair value of
MSRs is highly sensitive to changes in assumptions. For example, the
determination of fair value uses anticipated prepayment speeds. Actual
prepayment experience may differ and any difference may have a material effect
of the fair value. Thus, any measurement of MSRs' fair value is limited by
the conditions existing and assumptions as of the date made. Those
assumptions may not be appropriate if they are applied at different times.
Comparison of Financial Condition at March 31, 2006 and September 30, 2005
The Company's total assets increased $4.61 million to $557.38 million at March
31, 2006 from $552.77 million at September 30, 2005, primarily attributable to
a $5.13 million increase in net loans receivable and a $2.57 million increase
in cash and due from financial institutions. These increases were partially
offset by a $2.95 million decrease in investment securities.
Total deposits increased $2.37 million to $414.04 million at March 31, 2006
from $411.67 million at September 30, 2005 primarily attributable to an
increase in certificate of deposit accounts. Shareholders' equity increased
by $3.07 million to $77.71 million at March 31, 2006 from $74.64 million at
September 30, 2005 primarily attributable to retained net income.
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash and Due from Financial Institutions: Cash and due from financial
institutions increased to $31.29 million at March 31, 2006 from $28.72 million
at September 30, 2005. The increase was primarily a result of interest
bearing deposits in banks and federal funds sold increasing $3.94 million to
$12.64 million at March 31, 2006 from $8.70 million at September 30, 2005.
The increase was partially offset by a decrease of $1.37 million in
non-interest bearing deposits to $18.65 million at March 31, 2006 from $20.02
million at September 31, 2005.
Investment Securities and Mortgage-backed Securities: Investment securities
decreased by $2.95 million to $92.45 million at March 31, 2006 from $95.40
million at September 30, 2005, due to regular amortization and prepayments on
mortgage-backed securities. At March 31, 2006, the Company's securities'
portfolio was comprised of U.S. agency securities of $33.60 million, mutual
funds of $31.99 million, mortgage-backed securities of $21.16 million, and
FHLB stock of $5.70 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.
16
Loans: Net loans receivable increased by $5.13 million to $393.24 million at
March 31, 2006 from $388.11 million at September 30, 2005. The increase in
the portfolio was primarily a result of a $6.38 million increase in
construction loans (net of undisbursed portion), a $3.33 million increase in
land loans, a $2.75 million increase in consumer loans, and a $1.89 million
increase in multi-family loans. Partially offsetting these increases were
decreases of $5.46 million in one-to-four family mortgage loans, $2.58 million
in commercial business loans, and $1.37 million in commercial real estate
loans.
Loan demand remains relatively strong in the Bank's market areas, although an
unusually wet winter impacted the loan portfolio by delaying construction loan
disbursements on existing construction loans and kept some of the Bank's
builders from beginning new projects. Undisbursed construction loan balances
increased by $10.10 million to $52.87 million at March 31, 2006. Loan
originations totaled $43.98 million and $109.76 million for the three and six
months ended March 31, 2006 compared to $48.94 million and $110.38 million for
the three and six months ended March 31, 2005. The Bank also continued to
sell longer-term fixed rate loans for asset liability management purposes.
The Bank sold fixed rate one-to-four family mortgage loans totaling $5.52
million and $13.05 million for the three and six months ended March 31, 2006
compared to $4.63 million and $7.96 million for the three and six months ended
March 31, 2005.
For additional information, see the sections entitled "Loan Portfolio
Composition" and "Construction and Land Development Loan Portfolio
Composition" included herein.
Other Real Estate Owned and Other Repossessed Items: Other real estate owned
("OREO") and other repossessed items decreased to $110,000 at March 31, 2006
from $509,000 at September 30, 2005 as several properties were sold. At March
31, 2006, OREOs were comprised of three land parcels totaling $110,000. For
additional information, see the section entitled "Non-performing Assets"
included herein.
Premises and Equipment: Premises and equipment increased by $71,000 to $15.93
million at March 31, 2006 from $15.86 million at September 30, 2005, primarily
attributable to remodeling costs associated with several branch facilities.
Goodwill and Core Deposit Intangible: The value of goodwill and the amortized
value of core deposit intangible decreased $164,000 to $7.32 million at March
31, 2006 from $7.48 million at September 30, 2005. The decrease is
attributable to scheduled amortization of the core deposit intangible.
Deposits: Deposits increased by $2.37 million to $414.04 million at March 31,
2006 from $411.67 million at September 30, 2005. The deposit increase was
primarily as a result of a $12.2 million increase in certificate of deposit
accounts. This increase was partially offset by decreases of $7.33 million in
money market accounts, $1.38 million in savings accounts, and $1.12 million in
non-interest bearing accounts. For additional information, see the section
entitled "Deposit Breakdown" included herein.
FHLB Advances: FHLB advances decreased to $61.79 million at March 31, 2006
from $62.35 million at September 30, 2005 as the Bank repaid several advances.
For additional information, see "FHLB Advance Maturity Schedule" included
herein.
Shareholders' Equity: Total shareholders' equity increased by $3.07 million
to $77.71 million at March 31, 2006 from $74.64 million at September 30, 2005,
primarily as a result of net income of $3.95 million and a $544,000 increase
to additional paid in capital from the exercise of stock options and vesting
associated with the Company's benefit plans. Also increasing shareholders'
equity was a decrease of $264,000 in the equity component related to unearned
shares issued to the ESOP. These increases to shareholders' equity were
partially offset by the payment of $1.20 million in dividends to shareholders,
the repurchase of 8,200 shares of the Company's common stock for $193,000, and
a $292,000 increase in accumulated other comprehensive loss.
17
On April 7, 2005, the Company announced a plan to repurchase up to 5% of the
Company's outstanding shares, or 187,955 shares. This represents the
Company's 13th stock repurchase plan. As of March 31, 2006, the Company had
repurchased 36,050 of these shares at an average price of $23.26.
Cumulatively, the Company has repurchased 3,375,321 shares (51.0%) of the
6,612,500 shares that were issued when the Company went public in January
1998. The 3,375,321 shares have been repurchased at an average price of
$15.41 per share. For additional information, see Item 2 of Part II of this
Form 10-Q.
Non-performing Assets: Non-performing assets to total assets decreased to
0.39% at March 31, 2006 from 0.62% at September 30, 2005, as total
non-performing assets decreased to $2.15 million at March 31, 2006 from $3.44
million at March 31, 2005. The ratio decreased primarily as a result of an
$886,000 decrease in non-performing assets and a $399,000 decrease in OREO.
The non-performing loan total of $2.04 million at March 31, 2006 consisted of
a $1.36 million commercial construction loan, $505,000 in one-to-four family
loans and $179,000 in commercial real estate loans. Despite having a higher
historical 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 recovery of $20,000 during the six months ended March 31, 2006 and during
the last five fiscal years its net charge-offs to outstanding loans ratio
has averaged less than 0.10% per year. For additional information, see the
section entitled "Non-performing Assets" included herein.
Investment Securities
- ---------------------
The following table sets forth the composition of the Company's investment
securities portfolio.
At March 31, At September 30,
2006 2005
Amount Percent Amount Percent
----------------- ----------------
(In Thousands)
Held-to-maturity:
Mortgage-backed securities $ 89 0.10% $ 104 0.11%
Available-for-sale (at fair value)
U.S. agency securities 33,596 36.37 33,695 35.32
Mortgage-backed securities 21,072 22.72 23,735 24.88
Mutual funds 31,989 34.63 32,165 33.71
FHLB stock 5,705 6.18 5,705 5.98
------- ------ ------- ------
Total portfolio $92,451 100.00% $95,404 100.00%
======= ====== ======= ======
18
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 March 31, At September 30,
2006 2005
Amount Percent Amount Percent
----------------- ----------------
(In Thousands)
Mortgage Loans:
One-to-four family (1) $ 96,300 21.26% $101,763 23.24%
Multi family 22,058 4.87 20,170 4.61
Commercial 123,480 27.27 124,849 28.51
Construction and
land development 128,951 28.47 112,470 25.68
Land 28,314 6.25 24,981 5.71
-------- ------ -------- ------
Total mortgage loans 399,103 88.12 384,233 87.75
Consumer Loans:
Home equity and second
mortgage 34,704 7.66 32,298 7.38
Other 9,669 2.14 9,330 2.13
-------- ------ -------- ------
44,373 9.80 41,628 9.51
Commercial business loans 9,436 2.08 12,013 2.74
-------- ------ -------- ------
Total loans 452,912 100.00% 437,874 100.00%
====== ======
Less:
Undisbursed portion of
construction loans in process (52,869) (42,771)
Deferred loan origination fees (2,687) (2,895)
Allowance for loan losses (4,119) (4,099)
-------- --------
Total loans receivable, net $393,237 $388,109
======== ========
- --------------
(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 March 31, At September 30,
2006 2005
Amount Percent Amount Percent
----------------- ----------------
(In Thousands)
Custom and owner/builder const. $ 43,725 33.91% $ 41,810 37.17%
Speculative construction 36,936 28.64 29,635 26.35
Commercial real estate 35,135 27.25 24,064 21.40
Multi-family 2,419 1.88 10,754 9.56
Land development 10,736 8.32 6,207 5.52
-------- ------ -------- ------
Total construction loans $128,951 100.00% $112,470 100.00%
======== ====== ======== ======
19
Activity in the Allowance for Loan Losses
- -----------------------------------------
Activity in the allowance for loan losses for the three and six months ended
March 31, 2006 and 2005 is as follows:
Three Months Ended
March 31,
2006 2005
---------------------
(In Thousands)
Balance at beginning of period $4,117 $3,994
Provision for loan losses - - 20
Loans charged off - - (10)
Recoveries on loans previously charged off 2 3
---------------------
Net recoveries (charge-offs) 2 (7)
------ ------
Balance at end of period $4,119 $4,007
====== ======
Six Months Ended
March 31,
2006 2005
---------------------
(In Thousands)
Balance at beginning of period $4,099 $3,991
Provision for loan losses - - 20
Loans charged off - - (13)
Recoveries on loans previously charged off 20 9
---------------------
Net recoveries (charge-offs) 20 (4)
------ ------
Balance at end of period $4,119 $4,007
====== ======
20
Non-performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated.
At At
March 31, September 30,
2006 2005
--------------------------------
(In Thousands)
Loans accounted for on a non-accrual
basis:
Mortgage loans:
One-to-four family $ 505 $ 2,208
Commercial 179 261
Construction and land development 1,356 - -
Land - - 23
Consumer loans - - 133
Commercial business loans - - 301
-------- --------
Total 2,040 2,926
Accruing loans which are contractually
past due 90 days or more: - - - -
-------- --------
Total - - - -
Total of non-accrual and
90 days past due loans 2,040 2,926
Other real estate owned and other
repossessed items 110 509
-------- --------
Total non-performing assets $ 2,150 $ 3,435
======== ========
Restructured loans - - - -
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 0.51% 0.75%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 0.37% 0.53%
Non-performing assets as a percentage
of total assets 0.39% 0.62%
Loans receivable (1) $397,356 $392,208
======== ========
Total assets $557,383 $552,765
======== ========
- --------------
(1) Includes loans held-for-sale and is before the allowance for loan losses.
21
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 At
March 31, 2006 September 30, 2005
-------------- -------------------
(In Thousands)
Non-interest bearing $ 50,677 $ 51,792
N.O.W. checking 93,470 93,477
Savings 62,890 64,274
Money market accounts 41,961 49,295
Certificates of deposit under $100,000 120,668 117,618
Certificates of deposit $100,000 and over 44,369 35,209
-------- --------
Total Deposits $414,035 411,665
======== ========
FHLB Advance Maturity Schedule
- ------------------------------
The Bank has long- and short-term borrowing lines with the FHLB of Seattle
with total credit on the lines equal to 30% of the Bank's total assets,
limited by available collateral. Borrowings are considered short-term when
the original maturity is less than one year. FHLB advances consisted of the
following:
At March 31, At September 30,
2006 2005
Amount Percent Amount Percent
----------------- ----------------
(In Thousands)
Short-term $ 8,000 12.95% $ -- --%
Long-term 53,792 87.05 62,353 100.00
------- ------ ------- ------
Total FHLB advances $61,792 100.00% $62,353 100.00%
======= ====== ======= ======
The Bank's FHLB borrowings mature at various dates through January 2011 and
bear interest at rates ranging from 3.79% to 6.18%. Principal reduction
amounts due for future years ending September 30 are as follows (In
thousands):
2006 $ 8,030
2007 9,064
2008 15,070
2009 4,628
2010 - -
Thereafter 25,000
-------
Total $61,792
=======
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
22
Comparison of Operating Results for the Three and Six Months Ended March 31,
2006 and 2005
The Company's net income increased by $495,000, or 34.1% to $1.95 million for
the quarter ended March 31, 2006 from $1.45 million for the quarter ended
March 31, 2005. Diluted earnings per share increased by 32.5% to $0.53 for
the quarter ended March 31, 2006 from $0.40 for the quarter ended March 31,
2005.
For the six months ended March 31, 2006 net income increased by $1.01 million
or 34.2% to $3.95 million from $2.95 million for the six months ended March
31, 2005. Diluted earnings per share increased by 36.3% to $1.09 for the six
months ended March 31, 2006 from $0.80 for the six months ended March 31,
2005.
The improved profitability for the first two quarters of the fiscal year are
largely a result of the Company's focus on balancing the repricing
characteristics of its assets and liabilities. This has allowed the
maintenance of a healthy net interest margin in spite of the current flat
yield curve environment. The net interest margin increased to 4.84% and 4.85%
for the three and six months ended March 31, 2006, respectively, from 4.54%
and 4.56% for the three and six months ended March 31, 2005, respectively.
A more detailed explanation of the income statement categories is presented
below.
Net Income: Net income for the quarter ended March 31, 2006 increased
$495,000 to $1.95 million, or $0.53 per diluted share ($0.55 per basic share)
from $1.45 million, or $0.40 per diluted share ($0.42 per basic share) for the
quarter ended March 31, 2005. The $0.13 increase in diluted earnings per
share for the quarter ended March 31, 2006 was primarily a result of a
$656,000 ($433,000 net of income tax - $0.11 per diluted share) increase in
net interest income after provision for loan losses and a $169,000 ($112,000
net of income tax - $0.03 per diluted share) increase in non-interest income.
These items were partially offset by a $48,000 ($32,000 net of income tax -
$0.01 per diluted share) increase in non-interest expense.
Net income for the six months ended March 31, 2006 increased $1.01 million to
$3.95 million, or $1.09 per diluted share ($1.13 per basic share) from $2.95
million, or $0.80 per diluted share ($0.84 per basic share) for the six months
ended March 31, 2005. The $0.29 increase in diluted earnings per share for
the six months ended March 31, 2006 was primarily the result of a $1.31
million ($867,000 net of income tax - $0.24 per diluted share) increase in net
interest income after provision for loan losses, a $186,000 ($123,000 net of
income tax - $0.03 per diluted share) increase in non-interest income, a
$76,000 ($50,000 net of income tax - $0.01 per diluted share) decrease in
non-interest expense, and a lower number of weighted average shares
outstanding, which increased diluted earnings per share by approximately $0.01
Net Interest Income: Net interest income increased $636,000 to $6.06 million
for the quarter ended March 31, 2006 from $5.43 million for the quarter ended
March 31, 2005, primarily attributable to a larger interest earning asset base
and an increase in the Company's net interest margin. Total interest income
increased $1.22 million to $8.65 million for the quarter ended March 31, 2006
from $7.43 million for the quarter ended March 31, 2005 as average total
interest earning assets increased by $22.89 million to $500.84 million for the
three months ended March 31, 2006. The yield on interest earning assets
increased to 6.91% for the quarter ended March 31, 2006 from 6.22% for the
quarter ended March 31, 2005. Total interest expense increased by $583,000 to
$2.59 million for the quarter ended March 31, 2006 from $2.00 million for the
quarter ended March 31, 2005 as average interest bearing liabilities increased
$11.65 million to $424.07 million. The average rate paid on interest bearing
liabilities increased to 2.47% for the quarter ended March 31, 2006 from 1.94%
for the quarter ended March 31, 2005. The increased rate paid on interest
bearing liabilities was primarily attributable to increased rates paid on
certificate of deposit accounts and money market accounts. The net interest
margin increased to 4.84% for the quarter ended March 31, 2006 from 4.54% for
the quarter ended March 31, 2005.
23
Net interest income increased $1.29 million to $12.09 million for the six
months ended March 31, 2006 from $10.80 million for the six months ended March
31, 2005, primarily attributable to a larger interest earning asset base and
an increase in the Company's net interest margin. Total interest income
increased $2.36 million to $17.09 million for the six months ended March 31,
2006 from $14.73 million for the six months ended March 31, 2005 as average
total interest earning assets increased by $24.30 million to $498.03 million
for the six months ended March 31, 2006. The yield on interest earning assets
was 6.87% for the six months ended March 31, 2006 compared to 6.22% for the
six months ended March 31, 2005. Total interest expense increased by $1.07
million to $5.01 million for the six months ended March 31, 2006 from $3.94
million for the six months ended March 31, 2005 as average interest bearing
liabilities increased $13.53 million to $421.28 million. The average rate
paid on interest bearing liabilities increased to 2.38% for the six months
ended March 31, 2006 from 1.94% for the six months ended March 31, 2005. The
increase rate paid on interest bearing liabilities was primarily attributable
to increased rates paid on certificate of deposit accounts and money market
accounts. The net interest margin increased to 4.85% for the six months ended
March 31, 2006 from 4.56% for the six months ended March 31, 2005.
Provision for Loan Losses: There was no provision for loan losses established
for the six months ended March 31, 2006 as credit quality remained strong. The
allowance for loan losses, however, did increase during this period as a
result of a net recovery of $20,000.
The Bank has established a comprehensive methodology for determining the
provision for loan losses. On a quarterly basis the Bank performs an analysis
taking into consideration pertinent factors underlying the quality of the loan
portfolio. The factors include changes in the size and composition of the
loan portfolio, historic loss experience for various loan segments, changes in
economic conditions, delinquency rates, a detailed analysis of loans on
non-accrual status, and other factors to determine the level of allowance for
loan losses needed. Based on its comprehensive analysis, management deemed
the allowance for loan losses of $4.12 million at March 31, 2006 (1.04% of
loans receivable and 201.91% 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 $4.01 million
(1.05% of loans receivable and 130.99% of non-performing loans) at March 31,
2005. The Company had net recoveries of $2,000 and $20,000 for the three and
six months ended March 31, 2006 compared to net charge-offs of $7,000 and
$4,000 for the three and six months ended March 31, 2005. For additional
information, see the section entitled "Activity in the Allowance for Loan
Losses" included herein.
Non-interest Income: Total non-interest income increased $169,000 to $1.51
million for the quarter ended March 31, 2006 from $1.34 million for the
quarter ended March 31, 2005, primarily as a result of a $95,000 increase in
service charges on deposits, a $29,000 increase in servicing income on loans
sold, and a $27,000 increase in ATM transaction fees. The Bank also continued
to generate non-interest income from the sale of fixed-rate loans. During the
quarter ended March 31, 2006, the Bank sold $5.52 million in fixed rate
one-to-four family mortgages for a gain of $88,000 compared to sales of $4.63
million for a gain of $84,000 for the quarter ended March 31, 2005.
Total non-interest income increased by $186,000 to $3.06 million for the six
months ended March 31, 2006 from $2.88 million for the six months ended March
31, 2005, primarily as a result of a $179,000 increase in fees from the sale
of non-deposit investment products, a $118,000 increase in service charges on
deposits, and a $98,000 increase in servicing income on loans sold. These
increases were partially offset by a $228,000 decrease in gains from loan
sales. Income from loan sales was larger in the period a year as a result of
the sale of the Bank's credit card portfolio in December 2004, which resulted
in a gain of $245,000.
Non-interest Expense: Total non-interest expense increased by $48,000 to
$4.72 million for the quarter ended March 31, 2006 from $4.67 million for the
quarter ended March 31, 2005. The increase was primarily a result of a
$189,000 increase in salary expense, a $65,000 increase in premises and
equipment expense, and an increase of $17,000 in state and local tax expense.
These increases were partially offset by decreases of $33,000
24
in advertising expense, $36,000 real estate owned operation expense, and
$11,000 in postage and courier expense
Total non-interest expense decreased by $76,000 to $9.36 million for the six
months ended March 31, 2006 from $9.43 million for the six months ended March
31, 2005. Non-interest expenses were higher a year ago primarily attributable
to expenses of $183,000 related to the branch acquisition in October 2004 and
vesting expenses of $335,000 related to one of the Company's benefit plans.
Partially offsetting these expense decreases during the current year, were
increases in expenses related to salaries and employee benefits, premises and
equipment, and state and local taxes. The Company also began expensing stock
options under SFAS 123(R), which became effective for the Company on October
1, 2005. Total compensation expense related to stock options of $11,000 was
recorded for the six months ended March 31, 2006. As a result of the
decreased expenses and increased revenue, the Company's efficiency ratio
improved to 61.74% for the six months ended March 31, 2006 from 68.98% for the
six months ended March 31, 2005.
Provision for Income Taxes: The provision for income taxes increased to
$906,000 for the quarter ended March 31, 2006 from $624,000 for the quarter
ended March 31, 2005 primarily as a result of increased net income before
taxes. The Company's effective tax rate was 31.8% for the quarter ended March
31, 2006 and 30.1% for the quarter ended March 31, 2005. The higher effective
tax rate was primarily as a result of a lower percentage of tax exempt income
during the current quarter.
The provision for income taxes increased to $1.85 million for the six months
ended March 31, 2006 from $1.28 million for the six months ended March 31,
2005 primarily as a result of increased net income before taxes. The
Company's effective tax rate was 31.9% for the six months ended March 31, 2006
and 30.2% for the six months ended March 31, 2005. The higher effective tax
rate was primarily as a result of a lower percentage of tax exempt income
during the current period.
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 six
months ended March 31, 2006. 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 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 increased by
$2.57 million to $31.29 million at March 31, 2006 from $28.72 million at
September 30, 2005. The Company's liquid assets increased primarily due to an
increase in the level of federal funds sold.
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 March 31, 2006,
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
11.74%. The Bank also
25
maintained an uncommitted credit facility with the FHLB of Seattle that
provided for immediately available advances up to an aggregate amount of
$141.04 million, under which $61.79 million was outstanding at March 31, 2006.
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, construction and land development
loans, and consumer loans. At March 31, 2006, the Bank had loan commitments
totaling $29.11 million and undisbursed loans in process totaling $52.87
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 March 31, 2006 totaled $116.31 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 March 31, 2006, the Bank was in compliance with all applicable
capital requirements. For additional details see the section below entitled
"Regulatory Capital."
Regulatory Capital
- ------------------
The following table compares the Bank's regulatory capital at March 31, 2006
to its minimum regulatory capital requirements at that date (in thousands):
Percent of
Amount Adjusted Total Assets (1)
------ -------------------------
Tier 1 (leverage) capital $61,700 11.36%
Tier 1 (leverage) capital requirement 21,726 4.00
------- -----
Excess $39,974 7.36%
======= =====
Tier 1 risk adjusted capital $61,700 15.64%
Tier 1 risk adjusted capital
requirement 15,776 4.00
------- -----
Excess $45,924 11.64%
======= =====
Total risk based capital $65,819 16.69%
Total risk based capital requirement 31,552 8.00
------- -----
Excess $34,267 8.69%
======= =====
- -------------------
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$543.15 million. For the Tier 1 risk-based capital and total risk-based
capital calculations, percent of total risk-weighted assets of $394.40
million.
26
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Ended March 31, Six Months Ended March 31,
2006 2005 2006 2005
---------------------------- --------------------------
PERFORMANCE RATIOS:
Return on average
assets (1) 1.41% 1.10% 1.44% 1.12%
Return on average
equity (1) 10.18% 7.95% 10.44% 8.06%
Net interest margin (1) 4.84% 4.54% 4.85% 4.56%
Efficiency ratio 62.33% 69.04% 61.74% 68.98%
March 31, September 30,
2006 2005
--------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 2,040 $ 2,926
OREO & other repossessed assets 110 509
Total non-performing assets 2,150 3,435
Non-performing assets to total assets 0.39% 0.62%
Allowance for loan losses to
non-performing loans 201.91% 140.09%
Book value per share (2) $ 20.59 $ 19.85
Book value per share (3) $ 21.98 $ 21.30
Tangible book value per share (2) (4) $ 18.65 $ 17.86
Tangible book value per share (3) (4) $ 19.91 $ 19.16
- ----------------
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
(3) Calculation excludes ESOP shares not committed to be released
(4) Calculation subtracts goodwill and core deposit intangible from the
equity component
Three Months Ended March 31, Six Months Ended March 31,
2006 2005 2006 2005
---------------------------- --------------------------
AVERAGE BALANCE SHEET:
- ---------------------
Average total loans $397,880 $371,509 $394,290 $365,021
Average total interest
earning assets 500,835 477,946 498,030 473,730
Average total assets 553,210 527,453 550,792 525,958
Average total interest
bearing liabilities:
Average total interest
bearing deposits 361,893 357,825 361,755 352,740
Average FHLB advances
& other borrowings 62,176 54,597 59,528 55,010
Average shareholders'
equity 76,470 72,962 75,729 73,049
27
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, 2005 .
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 "Exchange
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 Exchange 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: There have been no changes in our internal
----------------------------
control over financial reporting (as defined in 13a-15(f) of the Exchange
Act) that occurred during the quarter ended March 31, 2006, that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. The Company continued,
however, to implement suggestions from its internal auditor and
independent auditors 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; as over
time, controls may 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
- ---------------------------------------------------------------------
The following table sets forth the shares repurchased by the Company during
the quarter:
28
Total No.
of Shares
Purchased as Maximum No.
Total Part of of Shares that
No. of Average Publicly May Yet Be
Shares Price Paid Announced Purchased
Period Purchased per Share Plan Under the Plan(1)
- ----------------------- --------- ---------- ----------- ---------------
01/01/2006 - 01/31/2006 - - $ - - - - 151,905
02/01/2006 - 02/28/2006 - - - - - - 151,905
03/01/2006 - 03/31/2006 - - - - - - 151,905
----- ------ -----
Total - - $ - - - -
===== ====== =====
(1) On April 7,2005, the Company announced a share repurchase plan
authorizing the repurchase of up to 5% of its outstanding shares, or
187,955 shares. As of March 31, 2006, a total of 36,050 shares had been
repurchased at an average price of $23.26 per share. All shares were
repurchased through open market broker transactions and no shares were
directly repurchased from directors or officers of the Company.
Item 3. Defaults Upon Senior Securities
- -----------------------------------------
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The Company's 2005 Annual Meeting of Shareholders was held on January 24, 2006
at the Hoquiam Timberland Library, 420 7th Street, Hoquiam, Washington. The
results of the vote on the election of directors, the only item presented at
the meeting, was as follows:
For Withheld
No. of Votes Percentage No. of Votes Percentages
------------------------- --------------------------
Clarence E. Hamre 3,352,426 98.88% 38,061 1.12%
(three-year term)
Andrea M. Clinton 3,356,965 99.01% 33,522 0.99%
(three-year term)
Ronald A. Robbel 3,355,556 98.97% 34,931 1.03%
(three-year term)
The following directors, who were not up for re-election at the Annual Meeting
of Shareholders, will continue to serve as directors: Michael R. Sand, David
A. Smith, Harold L. Warren, Jon C. Parker and James C. Mason.
Item 5. Other Information
- ---------------------------
None to be reported.
29
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)
10.6 Form of Incentive Stock Option Agreement (6)
10.7 Form of Non-qualified Stock Option Agreement (6)
10.8 Form of Management Recognition and Development Award
Agreement (6)
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
906 of the Sarbanes Oxley Act
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley Act
- ---------------
(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 the Registrant's 1999 Annual Meeting Proxy
Statement dated December 15, 1998.
(5) Incorporated by reference to the Registrant's 2004 Annual Meeting Proxy
Statement dated December 24, 2003.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 2005.
30
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: May 8, 2006 By: /s/Michael R. Sand
--------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 2006 By: /s/Dean J. Brydon
---------------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
31
EXHIBIT INDEX
Exhibit No. Description of Exhibit
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 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
32
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) 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
(d) 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: May 8, 2006 /s/Michael R. Sand
------------------------------
Michael R. Sand
Chief Executive Officer
33
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) 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
(d) 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: May 8, 2006 /s/Dean J. Brydon
----------------------------
Dean J. Brydon
Chief Financial Officer
34
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: May 8, 2006
35