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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____.
Commission file number 0-23333
TIMBERLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1863696
(State of Incorporation) (IRS Employer Identification No.)
624 Simpson Avenue, Hoquiam, Washington
(Address of principal executive office)
98550
(Zip Code)
(360) 533-4747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
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 FEBRUARY 3, 2003
----- --------------------------------------
common stock, $.01 par value 3,856,536
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6-7
Condensed Consolidated Statements of Comprehensive Income 8
Notes to Condensed Consolidated Financial Statements
(unaudited) 9-10
Item 2. Management's Discussion and Analysis of Financial Condition 11-19
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATION 23-25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002 and September 30, 2002
Dollars in Thousands
(unaudited)
December 31, September 30,
2002 2002
--------------------------
Assets
Cash and due from financial institutions $ 9,148 $ 10,580
Interest bearing deposits in banks 32,578 25,493
Securities held to maturity (fair value $522) 519
Securities available for sale 49,397 41,582
Federal Home Loan Bank stock 5,226 5,139
Loans receivable 311,657 322,997
Loans held for sale 2,580 3,161
Less: Allowance for loan losses (3,777) (3,630)
--------------------------
Total Loans 310,460 322,528
--------------------------
Accrued interest receivable 1,525 1,604
Premises and equipment 12,264 11,664
Real estate owned 692 680
Bank owned life insurance ("BOLI") 10,171 10,036
Other assets 1,930 1,748
--------------------------
Total Assets $ 433,910 $ 431,054
--------------------------
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 293,665 $ 292,316
Federal Home Loan Bank advances 61,722 61,759
Other liabilities and accrued expenses 2,454 2,583
--------------------------
Total Liabilities 357,841 356,658
--------------------------
Shareholders' Equity
Common Stock, $.01 par value; 50,000,000 shares
authorized; December 31, 2002-4,340,976 issued,
3,856,536 outstanding September 30, 2002-
4,340,976 issued, 3,856,536 outstanding (un-
allocated ESOP shares and unvested MRDP shares
are not considered outstanding) 43 43
Additional paid in capital 35,879 35,857
Unearned shares - Employee Stock Ownership Plan (5,287) (5,419)
Unearned shares - Management Recognition &
Development Plan (1,665) (1,826)
Retained earnings 46,572 45,210
Accumulated other comprehensive income 527 531
--------------------------
Total Shareholders' Equity 76,069 74,396
--------------------------
Total Liabilities and Shareholders' Equity $ 433,910 $ 431,054
--------------------------
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 2002 and 2001
Dollars in Thousands, Except Per Share Amounts
(unaudited)
Three Months Ended December 31,
2002 2001
-------------------------
Interest and Dividend Income
Loans receivable $ 6,583 $ 7,348
Securities available for sale and held
to maturity 243 412
Dividends from investments 260 160
Interest bearing deposits in banks 121 21
-------------------------
Total interest and dividend income 7,207 7,941
-------------------------
Interest Expense
Deposits 1,611 2,102
Federal Home Loan Bank advances 850 860
-------------------------
Total interest expense 2,461 2,962
-------------------------
Net interest income 4,746 4,979
Provision for loan losses 173 392
-------------------------
Net interest income after provision for
loan losses 4,573 4,587
-------------------------
Non-Interest Income
Service charges on deposits 530 403
Gain on sale of loans, net 430 280
Gain on sale of securities -- 3
BOLI net earnings 135 --
Escrow fees 73 73
Servicing income on loans sold 113 136
ATM transaction fees 186 133
Other 179 133
-------------------------
Total non-interest income 1,646 1,161
-------------------------
Non-Interest Expense
Salaries and employee benefits 2,010 1,707
Premises and equipment 363 320
Advertising 204 241
Loss from real estate operations and write-downs 32 33
ATM expenses 149 107
Other 733 698
-------------------------
Total non-interest expense 3,491 3,106
-------------------------
Income before income taxes 2,728 2,642
Provision for income taxes 860 936
-------------------------
Net Income $ 1,868 $ 1,706
Earnings per common share:
Basic $ 0.48 $ 0.43
Diluted $ 0.46 $ 0.42
Weighted average shares outstanding:
Basic 3,856,536 3,985,244
Diluted 4,019,197 4,087,192
Dividends per share: $ 0.12 $ 0.11
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, 2002 and the three months ended December 31, 2002
Dollars in Thousands Except Common Stock Shares
(unaudited)
Unearned
Shares Unearned
Issued to Shares Accumulated
Employee Issued to Other
Common Common Additional Stock Management Compre-
Stock Shares Stock Paid-In Ownership Recognition Retained hensive
Outstanding Amount Capital Trust Plan Earnings Income Total
----------- ------ ------- ----- ---------- -------- ------ ------
Balance, Sept. 30, 2001 4,010,303 $46 $39,574 ($5,948) ($2,471) $40,332 $ 276 $71,809
Net Income -- -- -- -- -- 6,891 -- 6,891
Repurchase of
Common Stock (274,272) (3) (4,411) -- -- -- -- (4,414)
Exercise of Stock Options 44,253 -- 588 -- -- -- -- 588
Cash Dividends
($.45 per share) -- -- -- -- -- (2,013) -- (2,013)
Earned ESOP Shares 35,267 -- 27 529 -- -- -- 556
Earned MRDP Shares 40,985 -- 79 -- 645 -- -- 724
Change in fair value of
securities available
for sale, net of tax -- -- -- -- -- -- 255 255
--------------------------------------------------------------------------------
Balance, Sept. 30, 2002 3,856,536 43 35,857 (5,419) (1,826) 45,210 531 74,396
--------------------------------------------------------------------------------
Net Income -- -- -- -- -- 1,868 -- 1,868
Cash Dividends
($.12 per share) -- -- -- -- -- (506) -- (506)
Earned ESOP Shares -- -- 22 132 -- -- -- 154
Earned MRDP Shares -- -- -- -- 161 -- -- 161
Change in fair value of
securities available
for sale, net of tax -- -- -- -- -- -- (4) (4)
--------------------------------------------------------------------------------
Balance, Dec. 31, 2002 3,856,536 $43 $35,879 ($5,287) ($1,665) $46,572 $ 527 $76,069
--------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2002 and 2001
Dollars in Thousands
(unaudited)
Three Months Ended December 31,
Cash flow from Operating Activities 2002 2001
--------------------------
Net income $ 1,868 $ 1,706
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 148 150
Federal Home Loan Bank stock dividends (87) (85)
Earned ESOP Shares 154 128
Earned MRDP Shares 161 179
Gain on sale of securities available for sale -- (3)
Loss (Gain) on sale of real estate owned, net 5 (3)
BOLI cash surrender value increase (135) --
Gain on sale of loans (430) (280)
Provision for loan and real estate owned losses 186 412
Loans originated for sale (34,216) (15,722)
Proceeds from sale of loans 35,227 15,717
Net increase (decrease) in other assets (103) 48
Decrease in other liabilities and accrued expenses,
net (129) (849)
--------------------------
Net Cash Provided by Operating Activities 2,649 1,398
Cash Flow from Investing Activities
Net decrease (increase) in interest-bearing
deposits in banks (7,085) 1,474
Purchase of securities (10,500) --
Proceeds from maturities of securities available
for sale 2,162 1,151
Proceeds from sale of securities available for sale -- 1,078
Decrease in loans receivable, net 11,314 884
Additions to premises and equipment (748) (765)
Additions to real estate owned (72) (360)
Proceeds from sale of real estate owned 42 319
--------------------------
Net Cash Provided by (Used in) Investing
Activities (4,887) 3,781
Cash Flow from Financing Activities
Increase (decrease) in deposits, net 1,349 (1,611)
Decrease in Federal Home Loan Bank advances, net (37) (2,942)
Proceeds from exercise of stock options -- 48
Repurchase of common stock -- (1,764)
Payment of dividends (506) (502)
--------------------------
Net Cash Provided (Used) by Financing Activities 806 (6,771)
Net Change in Cash (1,432) (1,592)
Cash and Due from Financial Institutions
Beginning of period 10,580 10,017
--------------------------
End of period $ 9,148 $ 8,425
==========================
See notes to unaudited condensed consolidated financial statements (continued)
6
Three Months Ended December 31,
2002 2001
--------------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 459 $ 660
Interest paid 2,455 3,123
Supplemental Disclosure of Noncash Investing
Activities
Market value adjustment of securities held
for sale, net of tax (4) (313)
Investment securities acquired in loan
securitization -- 12,226
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31, 2002 and 2001
Dollars in Thousands
(unaudited)
Three Months Ended December 31,
2002 2001
--------------------------
Comprehensive Income:
Net Income $ 1,868 $ 1,706
Change in fair value of securities
available for sale, net of tax (4) (313)
--------------------------
Total Comprehensive Income $ 1,864 $ 1,393
==========================
See notes to unaudited condensed consolidated financial statements
8
Timberland Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited consolidated financial
statements for Timberland Bancorp, Inc. ("Company") were prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with instructions for Form
10-Q and therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States
of America. However, all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the interim financial
statements have been included. All such adjustments are of a normal recurring
nature. The results of operations for the three months ended December 31, 2002
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
(b) Principles of Consolidation: The interim consolidated financial
statements include the accounts of Timberland Bancorp, Inc. and its
wholly-owned subsidiary, Timberland Bank ("Bank"), and the Bank's wholly-
owned subsidiary, Timberland Service Corp. All significant intercompany
balances have been eliminated in consolidation.
(c) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
9
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted earnings
per share is computed by dividing net income applicable to common stock by the
weighted average number of common shares and common stock equivalents for
items that are dilutive, net of shares assumed to be repurchased using the
treasury stock method at the average share price for the Company's common
stock during the period. Common stock equivalents arise from assumed
conversion of outstanding stock options and awarded but not released
Management Recognition and Development Plan ("MRDP") shares. In accordance
with Statement of Position ("SOP") 93-6, Employers' Accounting for Employee
Stock Ownership Plans (ESOP), issued by the American Institute of Certified
Public Accountants, shares owned by the Bank's Employee Stock Ownership Plan
that have not been allocated are not considered to be outstanding for the
purpose of computing earnings per share. At December 31, 2002 and 2001, there
were 361,483 and 396,750 ESOP shares, respectively, that had not been
allocated.
Three Months Ended December 31,
2002 2001
--------------------------------
Basic EPS computation
Numerator - Net Income $ 1,868,000 $ 1,706,000
Denominator - Weighted average
common shares outstanding 3,856,536 3,985,244
Basic EPS $ 0.48 $ 0.43
Diluted EPS computation
Numerator - Net Income $ 1,868,000 $ 1,706,000
Denominator - Weighted average
common shares outstanding 3,856,536 3,985,244
Effect of dilutive stock options 145,272 99,824
Effect of dilutive MRDP 17,389 2,124
----------- -----------
Weighted average common shares
and common stock equivalents 4,019,197 4,087,192
Diluted EPS $ 0.46 $ 0.42
(3) DIVIDEND
On January 23, 2003, the Company announced a quarterly cash dividend of $0.12
per common share. The dividend is to be paid February 21, 2003, to
shareholders of record as of the close of business February 7, 2003.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three months
ended December 31, 2002. This report contains certain "forward-looking
statements." The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with forward looking statements. These forward
looking statements may describe future plans or strategies and include the
Company's expectations of future financial results. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions
identify forward-looking statements. The Company's ability to predict results
or the effect of future plans or strategies is inherently uncertain. Factors
which could affect actual results include competition in the financial
services market for both deposits and loans, interest rate trends, the
economic climate in the Company's market areas and the country as a whole,
loan delinquency rates, and changes in federal and state regulation. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.
Comparison of Financial Condition at December 31, 2002 and September 30, 2002
Total Assets: Total assets increased to $433.9 million at December 31, 2002
from $431.1 million at September 30, 2002 primarily due to increased deposit
levels, the proceeds of which were invested in interest bearing deposits in
banks and investment securities.
Cash and Due from Financial Institutions: Cash and due from financial
institutions decreased to $9.1 million at December 31, 2002 from $10.6 million
at September 30, 2002.
Interest Bearing Deposits in Banks: Interest bearing deposits in banks
increased by 27.8% to $32.6 million at December 31, 2002 from $25.5 million at
September 30, 2002. This increase is primarily due to investing proceeds from
loan sales, loan prepayments, and increased customer deposits.
Securities and FHLB Stock: Securities and FHLB stock increased 18.0% to $55.1
million at December 31, 2002 from $46.7 million at September 30, 2002. This
increase is primarily due to investing proceeds from loan sales, loan
prepayments, and increased customer deposits.
Loans Receivable, and Loans Held-for-sale, net of allowance for loan losses:
Net loans receivable, including loans held-for-sale, decreased to $310.5
million at December 31, 2002 from $322.5 at September 30, 2002, primarily
reflected in a $10.2 million decrease in the Bank's one-to-four family
mortgage loan portfolio. The portfolio decrease was primarily due to loan
prepayments, as a result of the historically low home mortgage rates, and the
sale of a majority of the one-to-four family mortgages generated during the
quarter. During the current quarter the Bank originated loans of $50.9
million and sold $34.8 million in fixed rate one-to-four family mortgage
loans. Management elected to sell a majority of the fixed rate residential
loans originated instead of adding them to the Bank's portfolio due to the low
rate environment.
11
Real Estate Owned ("REO"): Real estate owned increased to $692,000 for
December 31, 2002 from $680,000 at September 30, 2002.
Premises and Equipment: Premises and equipment increased by $600,000 to $12.3
million at December 31, 2002 from $11.7 million at September 30, 2002. This
increase is primarily due to costs associated with the construction of the
Silverdale branch (which opened January 13, 2003) and the remodeling of a
commercial building in Hoquiam, which will become the future location of the
Bank's loan servicing and escrow departments.
Deposits: Deposits increased to $293.7 million at December 31, 2002 from
$292.3 million at September 30, 2002, primarily due to a $5.4 million increase
in the Bank's savings accounts and a $1.5 million increase in N.O.W. checking
accounts. These increases are partially offset by a $2.1 million decrease in
money market accounts, a $2.0 million decrease in non-interest bearing
accounts, and a $1.5 million decrease in certificate of deposit accounts.
Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased to $61.7
million at December 31, 2002 from $61.8 million at September 30, 2002.
Shareholders' Equity: Total shareholders' equity increased by $1.7 million to
$76.1 million at December 31, 2002 from $74.4 million at September 30, 2002.
The components of shareholders' equity were primarily affected by net income
of $1.9 million and the payment of $521,000 in dividends to shareholders.
Also affecting shareholders' equity were decreases of $161,000 in the equity
component related to unearned shares issued to the Management Recognition and
Development Plan and $132,000 in the equity component related to the unearned
shares issued to the Employee Stock Ownership Plan.
On May 10, 2002 the Company announced a plan to repurchase 193,659 shares of
the Company's stock. This marked the Company's tenth 5% stock repurchase
plan. As of December 31, 2002, the Company had purchased 117,400 of these
shares and cumulatively had repurchased 2,522,304 (38.1%) of the 6,612,500
shares that were issued when the Company went public in January 1998. No
shares were repurchased in the quarter ended December 31, 2002.
Non-performing Assets: Total non-performing assets increased to $4.9 million
for December 31, 2002 from $4.4 million at September 30, 2002. The Company's
non-performing asset ratio to total asset ratio ("NPA") increased to 1.12% at
December 31, 2002 from 1.03% at September 30, 2002. Nonaccrual loans
increased to $4.2 million at December 31, 2002 from $3.7 million at September
30, 2002. The increase was primarily a result of a $495,000 increase in
construction and land development loans on nonaccrual status.
12
Non Performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
December 31, September 30,
2002 2002
------------------------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to-four family $ 1,083 $ 1,138
Commercial 693 688
Construction and land development 2,066 1,571
Land 263 251
Consumer loans 22 49
Commercial Business Loans 42 44
--------- ---------
Total 4,169 3,741
Accruing loans which are contractually
past due 90 days or more: -- --
Total of nonaccrual and
90 days past due loans 4,169 3,741
Real estate owned and other
repossessed assets 692 680
--------- ---------
Total nonperforming assets 4,861 4,421
Restructured loans -- --
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable, (including loans held for sale)(1) 1.33% 1.15%
Nonaccrual and 90 days or more past
due loans as a percentage of total assets 0.96% 0.87%
Nonperforming assets as a percentage
of total assets 1.12% 1.03%
Loans receivable, (including loans
held for sale) (1) $ 314,237 $ 326,158
========= =========
Total assets $ 433,910 $ 431,054
========= =========
- --------------
(1) Loans receivable is before the allowance for loan losses
13
Loans Receivable
- ----------------
The following table sets forth the composition of the Company's loan portfolio
by type of loan.
At December 31, At September 30,
2002 2002
Amount Percent Amount Percent
--------------------- --------------------
(Dollars In thousands)
Mortgage Loans:
One-to-four family (1)(2) $ 102,973 30.27% $ 113,144 31.28%
Multi family 23,631 6.94 24,135 6.67
Commercial 95,598 28.10 97,644 27.00
Construction and
land development 71,541 21.03 80,144 22.16
Land 15,436 4.54 15,453 4.27
--------- ------ --------- ------
Total mortgage loans 309,179 90.88 330,520 91.38
Consumer Loans:
Home equity and second
mortgage 14,630 4.30 13,718 3.79
Other 8,073 2.37 8,097 2.24
22,703 6.67 21,815 6.03
Commercial business loans 8,336 2.45 9,365 2.59
--------- ------ --------- ------
Total loans 340,218 100.00% 361,700 100.00%
====== ======
Less:
Undisbursed portion of loans
in process (23,030) (32,324)
Unearned income (2,951) (3,218)
Allowance for loan losses (3,777) (3,630)
Market value adjustment of
loans held-for-sale -- --
--------- ---------
Total loans receivable, net $ 310,460 $ 322,528
========= =========
- ---------------
(1) Includes loans held-for-sale.
(2) Includes real estate contracts totaling $1.0 million at December 31,
2002.
Activity in the Allowance for Loan Losses
- -----------------------------------------
Activity in the allowance for loan losses in the three months ended December
31, 2002 and 2001 is as follows:
2002 2001
------ ------
Balance beginning of period $3,630 $3,050
Provision for loan losses 173 392
Loans charged off (39) (93)
Recoveries on loans previously charged off 13 3
Net charge offs (26) (90)
Balance at end of period $3,777 $3,352
14
Deposit Breakdown
- -----------------
The following table sets forth the balances of deposits in the various types
of accounts offered by the Bank at the dates indicated.
December 31, 2002 September 30, 2002
----------------- ------------------
(in thousands) (in thousands)
Non-interest bearing $ 21,625 $ 23,585
N.O.W. checking 43,769 42,222
Passbook savings 45,749 40,328
Money market accounts 45,769 47,888
Certificates of deposit under $100,000 102,525 102,052
Certificates of deposit $100,000 and over 34,228 36,241
--------- ---------
Total Deposits $ 293,665 $ 292,316
========= =========
Comparison of Operating Results for the Three Months Ended December 31, 2002
and 2001
Net Income: Net income for the quarter ended December 31, 2002 was $1.87
million, or $0.46 per diluted share ($0.48 per basic share) compared to $1.71
million, or $0.42 per diluted share ($0.43 per basic share) for the quarter
ended December 31, 2002. The primary factor affecting the improved
performance in the current quarter was increased non-interest income.
Net Interest Income: Net interest income decreased to $4.75 million for the
quarter ended December 31, 2002 from $4.98 million for the quarter ended
December 31, 2001. Total interest income decreased $734,000 to $7.21 million
for the quarter ended December 31, 2002 from $7.94 million for the quarter
ended December 31, 2001, primarily due to a reduction in average yields on
earning assets. The yield on earning assets was 7.11% for the quarter ended
December 31, 2002 compared to 8.63% for the quarter ended December 31, 2001.
The yield was impacted by a shift in the makeup of total earning assets. In
2001, loans, the Company's highest yielding class of assets, comprised 88% of
earning assets. In 2002, loans were 80% of average earning assets. This
change was largely influenced by the decision to sell many of the loans
originated in the current quarter. That had the effect of increasing the gain
on loans sold, at the expense of interest income. The impact of lower average
yields was, however, partially offset by increased levels of average earning
assets. Total interest expense decreased $501,000 to $2.46 million for the
quarter ended December 31, 2002 from $2.96 million for the quarter ended
December 31, 2001. The average cost of funds for each of the Bank's deposit
account types for the current quarter was lower than a year ago. The overall
cost of funds decreased to 2.95% for the quarter ended December 31, 2002 from
4.06% for the quarter ended December 31, 2001. As a result of these changes,
the net interest margin decreased to 4.68% for the quarter ended December 31,
2002 from 5.41% for the quarter ended December 31, 2001.
15
Provision for Loan Losses: The provision for loan losses decreased to
$173,000 for the three months ended December 31, 2002 from $392,000 for the
three months ended December 31, 2001. The Bank has established a systematic
methodology for the determination of provisions for loan losses. On a
quarterly basis the Bank performs an analysis taking into consideration
historic loss experience for various loan segments, changes in economic
conditions, delinquency rates, and other factors to determine the level of
allowance for loan losses needed.
Based on the systematic methodology, management deemed the allowance for loan
losses of $3.8 million at December 31, 2002 (1.21% of loans receivable and
90.6% of non-performing loans) adequate to provide for estimated losses based
on an evaluation of known and inherent risks in the loan portfolio at that
date. The allowance for loan losses was $3.4 million (1.09% of loans
receivable and 101.1% of non-performing loans) at December 31, 2001. The
increase in the level of the allowance for loan losses was judged appropriate
due to a slight change in the mix of the loan portfolio and the continuing
effects of the slow Northwest economy. Net charge-offs for the current
quarter were $27,000 compared to $90,000 in the same quarter of 2001.
Noninterest Income: Total non-interest income increased to $1.65 million for
the quarter ended December 31, 2002 from $1.16 million for the quarter ended
December 31, 2001, primarily due to a $150,000 increase in gain on sale of
loans, a $127,000 increase in service charges on deposits and the recognition
of $135,000 in BOLI income. The increased loan sale gains are primarily a
result of the Bank selling $34.8 million in fixed-rate one-to-four family
loans during the current quarter. During the same period in 2001, the Bank
sold $17.2 million in fixed-rate one-to-four family loans and converted $12.2
million in loans to mortgage-backed securities.
The increased deposit-related service charge income is primarily a result of
the Bank's checking account acquisition program. Service charges on deposits
increased 31.5% to $530,000 for the quarter ended December 31, 2002 from
$403,000 for the quarter ended December 31, 2001. Since the checking account
acquisition program began in December 2000, the Bank has increased the number
of its consumer checking accounts by 91% and increased its consumer checking
account balances by $23.7 million.
Noninterest Expense: Total non-interest expense increased by $385,000 to
$3.49 million for the three months ended December 31, 2002 from $3.11 million
for the three months ended December 31, 2001. This increase is primarily due
to a $303,000 increase in salaries and employee benefits. The increase in
salaries and employee benefits is primarily a result of adding employees to
staff the Silverdale branch, increasing staffing levels in several other
departments, and salary increases in October of 2002.
Provision for Income Taxes: The provision for income taxes decreased to
$860,000 for the three months ended December 31, 2002 from $936,000 for the
three months ended December 31, 2001 primarily as a result of increased
tax-exempt income from the Bank owned life insurance program that was
implemented in September 2002. The Company's effective tax rate was 31.5% in
2002 compared to 35.4% in 2001.
16
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans and mortgage backed securities, and
proceeds from the sale of loans, maturing securities and FHLB advances. While
maturities and the scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition.
The analysis of liquidity should also include a review of the changes that
appear in the consolidated statement of cash flows for the three months ended
December 31, 2002. The statement of cash flows includes operating, investing
and financing categories. Operating activities include net income, which is
adjusted for non-cash items, and increases or decreases in cash due to certain
changes in assets and liabilities. Investing activities consist primarily of
proceeds from maturities and sales of securities and purchases of securities,
and the net change in loans. Financing activities present the cash flows
associated with the Company's deposit accounts and other borrowings.
The Company's consolidated total of cash and due from financial institutions
decreased by $1.4 million to $9.1 million at December 31, 2002 from $10.6
million at September 30, 2002. The Company's level of interest bearing
deposits in banks, however increased by $7.2 million to $32.6 million at
December 31, 2002 from $25.5 million at September 30, 2002. The net increase
in cash and interest bearing deposits in banks is primarily a result of funds
received from loan prepayments and loan sales, which led to a net decrease of
$12.1 million in total loans.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
2002, the Bank's regulatory liquidity ratio (net cash, and short-term and
marketable assets, as a percentage of net deposits and short-term liabilities)
was 30.7%. The Bank also maintained an uncommitted credit facility with the
FHLB-Seattle that provided for immediately available advances up to an
aggregate amount of $134.0 million, under which $61.7 million was outstanding
at December 31, 2002.
Liquidity management is both a short and long-term responsibility of the
Bank's management. The Bank adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, and (iv) yields available on
interest-bearing deposits. Excess liquidity is invested generally in
interest-bearing overnight deposits and other short-term 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.
17
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 December 31, 2002, the Bank had loan commitments
totaling $22.3 million and undisbursed loans in process totaling $23.0
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 December 31, 2002 totaled $108.7 million.
Historically, the Bank has been able to retain a significant amount of its
deposits as they mature.
Federally-insured state-chartered banks are required to maintained minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At December 31, 2002, the Bank was in compliance with all
applicable capital requirements. For additional details see "Regulatory
Capital".
Regulatory Capital
- ------------------
The following table compares the Bank's regulatory capital at December 31,
2002 to its minimum regulatory capital requirements at that date (dollars in
thousands):
Percent of
Amount Adjusted Total Assets (1)
------ -------------------------
Tier 1 (leverage) capital $63,610 14.8%
Tier 1 (leverage) capital requirement 17,178 4.0
------- ----
Excess $46,432 10.8%
======= ====
Tier 1 risk adjusted capital $63,610 20.9%
Tier 1 risk adjusted capital requirement 12,153 4.0
------- ----
Excess $51,457 16.9%
======= ====
Total risk based capital $67,387 22.2%
Total risk based capital requirement 24,306 8.0
------- ----
Excess $43,081 14.2%
======= ====
- ------------------
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$429.4 million. For the Tier 1 risk-based capital and total risk-based
capital calculations, percent of total risk-weighted assets of $303.8 million.
18
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
For the Three Months Ended
December 31, September 30, December 31,
2002 2002 2001
---------------------------------------------
PERFORMANCE RATIOS:
Return on average assets (1) 1.72% 1.68% 1.77%
Return on average equity (1) 9.96% 9.36% 9.45%
Net interest margin (1) 4.68% 4.79% 5.41%
Efficiency ratio 54.62% 54.88% 50.59%
December 31, September 30, December 31,
2002 2002 2001
---------------------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 4,169 $ 3,741 $ 3,317
REO & other repossessed assets 692 680 1,030
Total non-performing assets 4,861 4,421 4,347
Non-performing assets to total
assets 1.12% 1.03% 1.14%
Allowance for loan losses to
non-performing loans 90.60% 97.03% 101.06%
Book Value Per Share (2) $ 17.52 $ 17.14 $ 15.98
Book Value Per Share (3) $ 19.07 $ 18.69 $ 17.51
- -------------------
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
(3) Calculation excludes ESOP shares not committed to be released
December 31, September 30, December 31,
2002 2002 2001
---------------------------------------------
AVERAGE BALANCE SHEET:
- ---------------------
Average Total Loans $ 325,200 $ 329,167 $ 323,052
Average Total Interest Earning
Assets 405,514 400,557 368,219
Average Total Assets 434,880 418,385 385,003
Average Total Interest Bearing
Deposits 272,037 258,547 226,005
Average FHLB Advances 61,735 61,813 66,020
Average Shareholders' Equity 75,000 75,147 72,249
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There were no material changes in information concerning market risk from the
information provided in the Company's Form 10-K for the fiscal year ended
September 30, 2002.
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 Section
13(a)-14(c) 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 the Company's senior management within the 90-day period
preceding the filing date of this quarterly 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 December 31, 2002,
the Company did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that
could significantly affect these controls. The Company, did, however,
continue to implement suggestions from its internal auditor on ways to
strengthen existing controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------------
Neither the Company nor the Bank is a party to any material legal proceedings
at this time. Further, neither the Company nor the Bank is aware of the
threat of any such proceedings. From time to time, the Bank is involved in
various claims and legal actions arising in the ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds
- ------------------------------------------------------
Change in Securities -- None to be reported.
Use of proceeds -- None to be reported.
Item 3. Defaults Upon Senior Securities
- -------------------------------------------
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------
An annual meeting of Shareholders of the Company was held on January 23, 2003.
The results of the vote on the matters presented at the meeting are as
follows:
The following individuals were elected as directors:
For Withheld
No. of Votes Percentage No. of Votes Percentages
------------------------- --------------------------
Clarence E. Hamre 3,582,571 98.42% 57,627 1.58%
(three-year term)
Robert Backstrom 3,582,571 98.42% 57,627 1.58%
(three-year term)
20
Andrea M. Clinton 3,582,571 98.42% 57,627 1.58%
(three-year term)
Ronald A. Robbel 3,582,571 98.42% 57,627 1.58%
(three-year term)
Harold L. Warren 3,582,571 98.42% 57,627 1.58%
(one-year term)
Item 5. Other Information
- -----------------------------
None to be reported.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant *
3(b) Bylaws of the Registrant *
10(a) Employee Severance Compensation Plan **
10(b) Timberland Savings Bank, S.S.B. Employee Stock Ownership
Plan **
10(c) Timberland Bancorp, Inc. 1999 Stock Option Plan ***
10(d) Timberland Bancorp, Inc. Management Recognition and
Development Plan ***
99 Certification Pursuant to Section 906 of the Sarbanes Oxley
Act
------------------
* Incorporated by reference to the Registrant's Registration
Statement of Form S-1 (333-35817).
** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997.
*** Incorporated by reference to the Registrant's Annual Meeting
Proxy Statement dated December 15, 1998.
(b) Reports on Form 8-K. The Registrant did not have any reports on
Form 8-K for the quarter ended December 31, 2002.
21
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: February 5, 2002 By: /s/ Clarence E. Hamre
-----------------------------
Clarence E. Hamre
Chief Executive Officer
(Principal Executive Officer)
Date: February 5, 2002 By: /s/ Dean J. Brydon
------------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
22
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Clarence E. Hamre, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Timberland
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regards to significant
deficiencies and material weaknesses.
Date: February 5, 2003
/s/ Clarence E. Hamre
---------------------------
Clarence E. Hamre
Chief Executive Officer
23
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Dean J. Brydon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Timberland
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regards to significant
deficiencies and material weaknesses.
Date: February 5, 2003
/s/ Dean J. Brydon
---------------------------
Dean J. Brydon
Chief Financial Officer
24
EXHIBIT 99.1
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/ Clarence E. Hamre /s/ Dean J. Brydon
- -------------------------------- -------------------------------
Chief Executive Officer Chief Financial Officer
Date: February 5, 2002