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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 March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____.
Commission file number 0-23333
TIMBERLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1863696
(State of Incorporation) (IRS Employer Identification No.)
624 Simpson Avenue, Hoquiam, Washington
(Address of principal executive office)
98550
(Zip Code)
(360) 533-4747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act):
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT APRIL 30, 2005
----- ------------------------------------
common stock, $.01 par value 3,759,119
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 9-13
Item 2. Management's Discussion and Analysis of Financial Condition 13-25
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 26-27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27-28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 and September 30, 2004
Dollars in Thousands
(unaudited)
March 31, September 30,
2005 2004
Assets ------------------------
Cash and due from financial institutions $ 16,731 $ 15,268
Interest bearing deposits in banks 1,006 3,385
Federal funds sold 210 1,180
Investment securities held to maturity 147 174
Investment securities available for sale 92,980 59,889
Federal Home Loan Bank stock 5,705 5,682
Loans receivable 381,696 347,975
Loans held for sale -- 610
Less: Allowance for loan losses (4,007) (3,991)
------------------------
Total Loans 377,689 344,594
------------------------
Accrued interest receivable 2,196 1,828
Premises and equipment 15,878 13,913
Real estate owned and other repossessed items 346 421
Bank owned life insurance ("BOLI") 11,237 11,028
Goodwill 5,645 --
Core deposit intangible 2,022 --
Other assets 3,081 3,057
------------------------
Total Assets $ 534,873 $ 460,419
------------------------
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 399,942 $ 319,570
Federal Home Loan Bank ("FHLB") advances 59,447 65,421
Other borrowings: repurchase agreements 1,472 --
Other liabilities and accrued expenses 2,320 2,611
------------------------
Total Liabilities 463,181 387,602
------------------------
Shareholders' Equity
Common Stock, $.01 par value; 50,000,000 shares authorized;
March 31, 2005-3,759,119 shares issued and outstanding
September 30, 2004-3,882,070 shares issued and
outstanding 38 39
Additional paid in capital 21,954 24,867
Unearned shares - Employee Stock Ownership Plan (4,098) (4,362)
Unearned shares - Management Recognition &
Development Plan (215) (537)
Retained earnings 54,762 52,967
Accumulated other comprehensive loss (749) (157)
------------------------
Total Shareholders' Equity 71,692 72,817
------------------------
Total Liabilities and Shareholders' Equity $ 534,873 $ 460,419
------------------------
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended March 31, 2005 and 2004
Dollars in Thousands, Except Per Share Amounts
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2005 2004 2005 2004
---------------- ----------------
Interest and Dividend Income
Loans receivable $ 6,690 $ 6,193 $13,298 $12,476
Securities available for sale and held to
maturity 520 239 910 483
Dividends from investments 251 250 517 519
Interest bearing deposits in banks 65 36 205 81
---------------- ----------------
Total interest and dividend income 7,526 6,718 14,930 13,559
Interest Expense
Deposits 1,257 1,082 2,437 2,210
FHLB advances and other borrowings 747 810 1,501 1,661
---------------- ----------------
Total interest expense 2,004 1,892 3,938 3,871
---------------- ----------------
Net interest income 5,522 4,826 10,992 9,688
Provision for loan losses 20 30 20 80
---------------- ----------------
Net interest income after provision 5,502 4,796 10,972 9,608
for loan losses
Non-Interest Income
Service charges on deposits 642 450 1,339 899
Gain on sale of loans, net 84 256 432 426
Loss on sale of securities -- (6) -- (6)
BOLI net earnings 110 112 209 227
Servicing income (expense) on loans sold (47) 14 (109) (4)
ATM transaction fees 213 147 410 296
Other 242 144 400 290
---------------- ----------------
Total non-interest income 1,244 1,117 2,681 2,128
Non-Interest Expense
Salaries and employee benefits 2,548 2,234 5,198 4,406
Premises and equipment 566 465 1,077 927
Advertising 212 201 377 352
Real estate owned expense (income) (3) (90) (30) (74)
ATM expenses 103 91 216 192
Postage and courier 143 94 301 186
Amortization of core deposit intangible 94 -- 179 --
Other 1,008 848 2,113 1,680
---------------- ----------------
Total non-interest expense 4,671 3,843 9,431 7,669
Income before federal income taxes 2,075 2,070 4,222 4,067
Federal Income Taxes 624 647 1,277 1,258
---------------- ----------------
Net Income $ 1,451 $ 1,423 $ 2,945 $ 2,809
================ ================
Earnings Per Common Share:
Basic $0.42 $0.38 $0.84 $0.74
Diluted $0.40 $0.36 $0.80 $0.71
Weighted average shares outstanding:
Basic 3,488,385 3,702,491 3,522,062 3,774,929
Diluted 3,644,604 3,901,469 3,681,282 3,975,302
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended September 30, 2004 and the six months ended March 31, 2005
Dollars in Thousands Except Common Stock Shares
(unaudited)
Unearned
Shares Unearned Accumulated
Issued to Shares Other
Employee Issued to Compre-
Common Common Additional Stock Management hensive
Stock Shares Stock Paid-In Ownership Recognition Retained Income
Outstanding Amount Capital Trust Plan Earnings (Loss) Total
----------- ------ ------- --------- ---------- -------- ------ -------
Balance, Sept. 30, 2003 4,251,680 $43 $33,775 ($4,891) ($1,182) $49,699 $ 167 $77,611
Net income -- -- -- -- -- 5,588 -- 5,588
Repurchase of
common stock (482,016) (5) (11,074) -- -- -- -- (11,079)
Exercise of stock options 112,406 1 1,747 -- - -- -- 1,748
Cash dividends
($.57 per share) -- -- -- -- -- (2,320) -- (2,320)
Earned ESOP shares -- 283 529 - -- -- 812
Earned MRDP shares -- 136 -- 645 -- -- 781
Change in fair value of
securities available
for sale, net of tax -- -- -- -- -- -- (324) (324)
-----------------------------------------------------------------------------------
Balance, Sept. 30, 2004 3,882,070 39 24,867 (4,362) (537) 52,967 (157) 72,817
-----------------------------------------------------------------------------------
Net income - -- -- -- -- 2,945 -- 2,945
Repurchase of
common stock (146,584) (1) (3,419) - -- -- -- (3,420)
Exercise of stock options 23,633 -- 346 -- -- - -- 346
Cash dividends
($.30 per share) -- -- -- - -- (1,150) -- (1,150)
Earned ESOP shares -- -- 151 264 -- -- -- 415
Earned MRDP shares -- -- 9 -- 322 -- -- 331
Change in fair value of
securities available
for sale, net of tax -- -- -- -- -- -- (592) (592)
-----------------------------------------------------------------------------------
Balance, March 31, 2005 3,759,119 $38 $21,954 ($4,098) ($215) $54,762 ($749) $71,692
-----------------------------------------------------------------------------------
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, 2005 and 2004
Dollars in Thousands
(unaudited)
Six Months Ended March 31,
Cash Flow from Operating Activities 2005 2004
------------------
Net income $2,945 $2,809
Noncash revenues, expenses, gains and losses
included in income:
Depreciation 465 386
Amortization of core deposit intangible 181 --
Federal Home Loan Bank stock dividends (23) (124)
Earned ESOP Shares 415 345
Earned MRDP Shares 331 415
Loss on sale of securities available for sale - 6
Gain on sale of real estate owned, net (40) (115)
Loss on sale of premises and equipment 13 --
BOLI cash surrender value increase (209) (227)
Gain on sale of loans (432) (426)
Provision for loan and real estate owned losses 45 91
Loans originated for sale (4,022) (22,574)
Proceeds from sale of loans 5,064 23,298
(Increase) decrease in other assets, net (103) 172
Increase (decrease) in other liabilities and accrued
expenses, net (338) 29
------------------
Net Cash Provided by Operating Activities 4,292 4,085
Cash Flow from Investing Activities
Decrease in interest-bearing deposits in banks, net 2,379 20,200
Increase in federal funds sold 970 --
Purchase of securities available for sale (38,973) (9,000)
Proceeds from maturities of securities available for sale 4,982 7,303
Proceeds from maturities of securities held to maturity 27 --
Increase in loans receivable, net (33,966) (12,783)
Additions to premises and equipment (385) (720)
Purchase of Venture branches, net of cash and cash
equivalents 76,630 --
Proceeds from the disposition of premises and equipment 6 --
Proceeds from sale of real estate owned 350 965
------------------
Net Cash Provided by Investing Activities 12,020 5,965
Cash Flow from Financing Activities
Increase (decrease) in deposits, net (6,123) 9,348
Decrease in Federal Home Loan Bank advances, net (5,974) (6,582)
Increase in repurchase agreements 1,472 --
Proceeds from exercise of stock options 346 996
Repurchase of common stock (3,420) (9,489)
Payment of dividends (1,150) (1,195)
------------------
Net Cash Used in Financing Activities (14,849) (6,922)
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, 2005 and 2004
Dollars in Thousands
(unaudited)
Six Months Ended March 31,
2005 2004
--------------------
Net Change in Cash 1,463 3,128
Cash and Due from Financial Institutions
Beginning of period 15,268 8,587
--------------------
End of period $ 16,731 $ 11,715
--------------------
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 930 $ 775
Interest paid 3,828 3,884
Supplemental Disclosure of Non-cash Investing Activities
Market value adjustment of securities held for sale,
net of tax (592) 16
Loans transferred to real estate owned 233 76
Supplemental Disclosure of Branch Acquisition
Premium paid on deposits (7,848) --
Fair value of assets acquired, principally property
and equipment (2,064) --
Deposits assumed 86,495 --
Other liabilities assumed 47 --
Net cash provided by branch acquisition 76,630 --
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended March 31, 2005 and 2004
Dollars in Thousands
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2005 2004 2005 2004
Comprehensive Income: ------------------ ----------------
Net Income $1,451 $1,423 $2,945 $2,809
Change in fair value of securities
available for sale, net of tax (438) 63 (592) 16
------------------ ----------------
Total Comprehensive Income $1,013 $1,486 $2,353 $2,825
================= ================
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 Timberland Bancorp, Inc. 2004 Annual Report on Form 10-K. The results of
operations for the three and six months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the entire fiscal year.
(b) Principles of Consolidation: The interim condensed consolidated financial
statements include the accounts of Timberland Bancorp, Inc. and its wholly-owned
subsidiary, Timberland Bank ("Bank"), and the Bank's wholly-owned subsidiary,
Timberland Service Corp. All significant intercompany balances have been
eliminated in consolidation.
(c) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
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 March 31, 2005 and 2004, there were 290,949 and 326,216 ESOP shares,
respectively, that had not been allocated.
Three Months Ended Six Month Ended
March 31, March 31,
2005 2004 2005 2004
Basic EPS computation ------------------ -----------------
Numerator - Net Income $1,451,000 $1,423,000 $2,945,000 $2,809,000
Denominator - Weighted average
common shares outstanding 3,488,385 3,702,491 3,522,062 3,774,929
--------- --------- --------- ---------
Basic EPS $ 0.42 $ 0.38 $ 0.84 $ 0.74
Diluted EPS computation
Numerator - Net Income $1,451,000 $1,423,000 $2,945,000 $2,809,000
Denominator - Weighted average
common shares outstanding 3,488,385 3,702,491 3,522,062 3,774,929
Effect of dilutive stock options 133,594 167,605 139,865 171,979
Effect of dilutive MRDP 22,625 31,373 19,355 28,394
Weighted average common shares --------- --------- --------- ---------
and common stock equivalents 3,644,604 3,901,469 3,681,282 3,975,302
--------- --------- --------- ---------
Diluted EPS $ 0.40 $ 0.36 $ 0.80 $ 0.71
10
(3) STOCK BASED COMPENSATION
At March 31, 2005 the Company has an employee, officer, and director stock
option plan. The Company accounts for options granted under that plan under the
recognition and measurement principles of APB No. 25, Accounting for Stock
Issued to Employees and related interpretations. Accordingly, no stock-based
compensation cost is reflected in net income as the exercise price for all
options granted under the plan was equal to the market value of the Company's
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share for the three and six months ended March 31, 2005
and 2004 if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation for the effects of all
options granted:
Three Months Ended Six Month Ended
March 31, March 31,
2005 2004 2005 2004
------------------ -----------------
Net income as reported $1,451,000 $1,423,000 $2,945,000 $2,809,000
Less total stock-based
compensation expense
determined under fair
value method for all
qualifying awards, net of tax (143,000) (43,000) (174,000) (80,000)
--------- --------- --------- ---------
Pro forma net income $1,308,000 $1,380,000 $2,771,000 $2,729,000
--------- --------- --------- ---------
Earnings per share:
Basic:
As reported $ 0.42 $ 0.38 $ 0.84 $ 0.74
Pro forma 0.38 0.37 0.79 0.72
Diluted:
As reported $ 0.40 $ 0.36 $ 0.80 $ 0.71
Pro forma 0.36 0.36 0.76 0.69
11
(4) ACQUISITION
On October 9, 2004, Timberland Bank, the subsidiary of the Company completed the
acquisition of seven branch offices and related deposits from Venture Bank, the
subsidiary of the Venture Financial Group. The Bank acquired $86.3 million in
deposits. In addition the Bank acquired the real estate, branch infrastructure
and employees of the seven branches. The Bank paid $1.8 million for the branch
buildings and fixed assets. The Bank paid a premium for the deposits and
recorded intangible assets (the excess of the purchase price over the net fair
value of the assets and liabilities acquired) in the amount of $7.8 million.
As part of the accounting for the acquisition, the intangible assets were
recorded as goodwill and core deposit intangible in the amounts of $5.6 million
and $2.2 million, respectively.
The Company will follow the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 provides that goodwill is no longer amortized
and the value of an identifiable intangible asset is amortized over its useful
life, unless the asset is determined to have an indefinite life. The Company
will review the recorded value of the goodwill on an annual basis for
impairment. The annual test for impairment will be a two-step process. The
first step will be to compare the current value of the acquired branch offices
and related deposits with the fair value on the purchase date. If the current
value exceeds the purchase value, goodwill will not be considered to be impaired
and the test is completed. If the purchase date fair value is determined to be
greater than the current value, the implied value of the goodwill will be
compared to the recorded value of the goodwill. Any noted impairment losses
will be recorded at that time.
The core deposit intangible recorded as part of the acquisition has an estimated
life of ten years and will be amortized using an accelerated method over the
ten-year period.
(5) SUBSEQUENT EVENTS
On April 7, 2005 the Company announced a plan to repurchase up to 5% of the
Company's outstanding shares, or 187,955 shares. This is the Company's 13th
stock repurchase plan. Share repurchases are scheduled to commence on April 28,
2005, subject to market conditions.
On April 26, 2005, the Company announced a quarterly cash dividend of $0.15 per
common share. The dividend is to be paid May 24, 2005, to shareholders of
record as of the close of business May 10, 2005.
On May 2, 2005, the Company announced that on April 26, 2005 its Board of
Directors had accelerated the vesting of underwater stock options previously
awarded under the Timberland Bancorp, Inc. 1999 Stock Option Plan and the
Timberland Bancorp, Inc. 2003 Stock Option Plan in light of the new accounting
regulations that will take effect in the Company's next fiscal year. The Board
took this action with the belief that it is in the best interests of its
shareholders as it will reduce the Company's reported compensation expense in
future periods. As a result of the vesting acceleration, options to purchase
approximately 27,500 shares of Timberland Bancorp, Inc. common stock became
exercisable immediately. All of these stock options were considered underwater
or out of the money since the option's exercise price was greater than the
current market value. As a result of the acceleration, Timberland Bancorp,
Inc. is not expected to be required to recognize anticipated stock option
expense net of taxes, of $54,000 in fiscal 2006 through fiscal 2008. The
Company will, however, as a result of this action record a footnote stock based
compensation expense of approximately $54,000 net of taxes in the quarter ending
June 30, 2005.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No, 123 (Revised),
"Share-Based Payment" (FAS 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
12
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. Statement 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. FAS123(R) replaces existing requirements under FASB Statement
No. 123, Accounting for Stock-Based Compensation, and eliminates the ability to
account for share-based compensation transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees. For the Company, the Statement is
effective for the interim reporting period beginning October 1, 2005. Adoption
of the Standard will impact the consolidated financial statements by requiring
compensation expense to be recorded for the unvested portion of stock options,
which have been granted or which are subsequently granted.
On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue No. 03-1-1
delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments",
which provides guidance for determining the meaning of "other-than-temporarily
impaired" and its application to certain debt and equity securities within the
scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and investments accounted for under the cost method. The guidance
requires that investments which have declined in value due to credit concerns or
solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. The delay of the effective date of EITF 03-1 will be superceded
concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP
Issue 03-1-a is intended to provide implementation guidance with respect to all
securities analyzed for impairment under paragraphs 10-20 of EITF 03-1.
Management continues to closely monitor and evaluate how the provisions of EITF
03-1 and proposed FSP Issue 03-1-a will affect the Company.
In December 2003, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 03-3 ("SOP 03-3"), Accounting for Certain Loans
or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting
for differences between contractual cash flows and the cash flows expected to be
collected from purchased loans or debt securities if those differences are
attributable, in part, to credit quality. SOP 03-3 requires purchased loans and
debt securities to be recorded initially at fair value based on the present
value of the cash flows expected to be collected with no carryover of any
valuation allowance previously recognized by the seller. Interest income should
be recognized based on the effective yield from the cash flows expected to be
collected. To the extent that the purchased loans or debt securities experience
subsequent deterioration in credit quality, a valuation allowance would be
established for any additional cash flows that are not expected to be received.
However, if more cash flows subsequently are expected to be received than
originally estimated, the effective yield would be adjusted on a prospective
basis. SOP 03-3 will be effective for loans and debt securities acquired after
December 31, 2004. Management does not expect the adoption of this statement 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, 2005. This report contains certain "forward-looking
statements." The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protection of such safe harbor with forward looking statements. These forward
looking statements
13
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 March 31, 2005 and September 30, 2004
Total Assets: Total assets increased $74.45 million to $534.87 million at March
31, 2005 from $460.42 million at September 30, 2004 primarily due to a $33.10
million increase in net loans receivable, a $33.06 million increase in
investment securities, a $7.67 million increase in goodwill and core deposit
intangible, and a $1.97 million increase in premises and equipment. This growth
was primarily funded by the net cash received in connection with the acquisition
of seven branch offices and related deposits in October 2004.
Cash and Due from Financial Institutions: Cash and due from financial
institutions increased to $16.73 million at March 31, 2005 from $15.27 million
at September 30, 2004.
Interest Bearing Deposits in Banks and Federal Funds Sold: Interest bearing
deposits in banks and federal funds sold decreased to $1.22 million at March 31,
2005 from $4.57 million at September 30, 2004 as a portion of these liquid funds
were used to fund loan growth and purchase investment securities.
Investment Securities: Investment securities increased $33.06 million to $93.13
million at March 31, 2005 from $60.06 million at September 30, 2004. The
increase was primarily a result of investing a portion of the net cash received
in connection with the acquisition of seven branch offices and related deposits
into U.S agency securities and mortgage-backed securities. At March 31, 2005,
the Company's securities' portfolio was comprised of mutual funds of $32.40
million, mortgage-backed securities of $27.09 million, and U.S. agency
securities of $33.64 million. The mutual funds invest primarily in
mortgage-backed products and U.S. agency securities.
Loans: Net loans receivable increased by $33.10 million to $377.69 million at
March 31, 2005 from $344.59 million at September 30, 2004. The increase in the
portfolio was primarily a result of a $16.76 million increase in commercial real
estate loans, a $6.00 million increase in one-to-four family mortgage loans, a
$5.27 million increase in construction loans (net of undisbursed portion), a
$3.66 million increase in consumer loans, a $1.89 million increase in land
loans, and a $746,000 increase in commercial business loans. These increases
were partially offset by a $610,000 decrease in loans held for sale and a
$601,000 decrease in multi-family loans.
Loan originations totaled $48.94 million and $110.38 million for the three and
six months ended March 31, 2005 compared to $32.40 million and $86.72 million
for the same periods a year earlier. The Bank sold loans totaling $4.63 million
and $9.45 million ($7.96 million in fixed rate one-to-four family mortgage loans
and $1.52 million in credit card loans) during the three and six months ended
March 31, 2005, compared to $12.62 million and $22.87 million in fixed rate
one-to-four family mortgage loans sold for the same periods a year earlier.
For additional information, see "Loan Portfolio Composition" section and
"Construction and Land Development Loan Portfolio Composition" section included
herein.
14
Real Estate Owned and Other Repossessed Items: Real estate owned ("REO") and
other repossessed items decreased to $346,000 at March 31, 2005 from $421,000 at
September 30, 2004 as several properties were sold. At March 31, 2005, the REO
and other repossessed item amounts were comprised of land parcels totaling
$335,000 and vehicles and other personal property totaling $11,000. For
additional information, see "Non-performing assets" section included herein.
Premises and Equipment: Premises and equipment increased by $1.97 million to
$15.88 million at March 31, 2005 from $13.9 million at September 30, 2004. This
increase is primarily due to the acquisition of seven branch offices in October
2004. The acquired offices are located in Toledo, Winlock, Elma, Montesano,
Hoquiam, Aberdeen and Panorama City (Lacey), Washington. Timberland acquired
the real estate for all of these offices with the exception of the facility in
Panorama City, which is leased. Subsequent to the acquisition, two of the
acquired offices (Montesano and Hoquiam) were consolidated with existing
Timberland branch offices.
Goodwill and Core Deposit Intangible: Goodwill and core deposit intangible
increased to $7.67 million at March 31, 2005 as the Bank paid a premium for
$86.30 million in deposits acquired in October 2004.
Deposits: Deposits increased by $80.37 million to $399.94 million at March 31,
2005 from $319.57 million at September 30, 2004, primarily due to the
acquisition of $86.30 million in deposits from in October 2004. The $80.37
million deposit increase is comprised of a $33.55 million increase in
certificate of deposit accounts, an $18.67 million increase in N.O.W. checking
accounts, a $14.38 million increase in savings accounts, a $7.05 million
increase in money market accounts, and a $6.72 million increase in non-interest
bearing accounts. For additional information, see "Deposit Breakdown" section
included herein.
Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased to $59.45
million at March 31, 2005 from $65.42 million at September 30, 2004 as the Bank
repaid several maturing advances with proceeds received in connection with the
acquisition of seven branch offices and related deposits in October 2004. For
additional information, see "FHLB Advance Maturity Schedule" included herein.
Shareholders' Equity: Total shareholders' equity decreased by $1.13 million to
$71.69 million at March 31, 2005 from $72.82 million at September 30, 2004,
primarily due to the repurchase of 146,584 shares of the Company's stock for
$3.42 million, the payment of $1.15 million in dividends to shareholders, and a
$592,000 increase in accumulated other comprehensive loss. Partially offsetting
these decreases to shareholders' equity were net income of $2.95 million and a
$506,000 increase to additional paid in capital from the exercise of stock
options and the vesting of shares associated with Bank's benefit plans. Also
increasing shareholders' equity were decreases of $322,000 and $264,000 in the
equity components related to unearned shares issued to the Management
Recognition and Development Plan and the Employee Stock Ownership Plan,
respectively.
On March 15, 2005 the Company announced that it had completed its 12th stock
repurchase program and repurchased 360,670 shares, at an average price of $23.04
per share. Cumulatively the Company has now repurchased 3,339,271 (50.5%) of
the 6,612,500 shares that were issued when the Company went public in January
1998 at an average price of $15.32 per share.
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 is the Company's 13th
stock repurchase plan. Share repurchases are scheduled to commence on April 28,
2005, subject to market conditions. For additional information, see Item 2 of
Part II of this Form 10-Q.
Non-performing Assets: The Company's non-performing asset ratio to total asset
ratio ("NPA") increased to 0.64% at March 31, 2005 from 0.40% at September 30,
2004, as total non-performing assets increased to $3.35
15
million from $1.86 million. The ratio increased primarily due to a $1.62
million increase in non-performing loans.
The non-performing loan total of $3.06 million at March 31, 2005 consisted of
$2.20 million in commercial real estate loans, $405,000 in one-to-four family
loans, $348,000 in commercial business loans, and $109,000 in land loans.
Despite historically having a higher percentage of non-performing loans than the
Company's relevant peer group, the Company's actual charge-offs have remained
low. The Company had a net charge-off of $4,000 during the six months ended
March 31, 2005 and during the last five fiscal years its net charge-offs to
outstanding loans ratio has averaged less than .10% per year.
16
Non Performing Assets
- ---------------------
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
March 31, September 30,
2005 2004
--------------------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to-four family $ 405 $ 430
Commercial 2,197 640
Land 109 322
Consumer loans -- 23
Commercial business loans 348 27
-------- --------
Total 3,059 1,442
Accruing loans which are contractually
past due 90 days or more: -- --
-------- --------
Total -- --
Total of nonaccrual and
90 days past due loans 3,059 1,442
Real estate owned and other
repossessed items 346 421
-------- --------
Total nonperforming assets $3,405 $1,863
======== ========
Restructured loans - --
Nonaccrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 0.80% 0.41%
Nonaccrual and 90 days or more past
due loans as a percentage of total assets 0.57% 0.31%
Nonperforming assets as a percentage
of total assets 0.64% 0.40%
Loans receivable (1) $381,696 $348,585
======= =======
Total assets $534,873 $460,419
======= =======
______________
(1) Includes loans held-for-sale and is before the allowance for loan losses
17
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,
2005 2004
Amount Percent Amount Percent
----------------- ----------------
(Dollars in thousands)
Mortgage Loans:
One-to-four family (1) $105,220 24.74% $99,835 25.25%
Multi family 16,559 3.89 17,160 4.34
Commercial 125,035 29.40 108,276 27.39
Construction
and land development 108,387 25.49 106,241 26.88
Land 21,788 5.12 19,895 5.03
-------- ------- -------- -------
Total mortgage loans 376,989 88.64 351,407 88.89
Consumer Loans:
Home equity and second mortgage 27,676 6.51 23,549 5.96
Other 8,800 2.07 9,270 2.34
-------- ------- -------- -------
36,476 8.58 32,819 8.30
Commercial business loans 11,844 2.78 11,098 2.81
-------- ------- -------- -------
Total loans 425,309 100.00% 395,324 100.00%
======= =======
Less:
Undisbursed portion of
construction loans in process (40,440) (43,563)
Unearned income (3,173) (3,176)
Allowance for loan losses (4,007) (3,991)
-------- --------
Total loans, net $377,689 $344,594
======== ========
________________
(1) Includes loans held-for-sale.
Construction and Land Development Loan Portfolio Composition
- ------------------------------------------------------------
The following table sets forth the composition of the Company's construction and
land development loan portfolio as of the dates indicated.
At March 31, At September 30,
2005 2004
Amount Percent Amount Percent
----------------- ----------------
(Dollars in thousands)
Custom and owner/builder const. $ 39,353 36.31% $43,801 41.23%
Speculative construction 27,586 25.45 22,228 20.92
Commercial real estate 24,817 22.90 25,633 24.13
Multi-family 11,034 10.18 3,352 3.15
Land development 5,597 5.16 11,227 10.57
-------- ------- -------- -------
Total construction loans $108,387 100.00% $106,241 100.00%
======== ======= ======== =======
18
Activity in the Allowance for Loan Losses
- -----------------------------------------
Activity in the allowance for loan losses for the six months ended March 31,
2005 and 2004 is as follows:
2005 2004
------------------------
(Dollars in thousands)
Balance beginning of period $3,991 $3,891
Provision for loan losses 20 80
Loans charged off (13) (59)
Recoveries on loans previously charged off 9 15
Net charge offs (4) (44)
------ ------
Balance at end of period $4,007 $3,927
====== ======
19
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.
March 31, 2004 September 30, 2004
-------------- ------------------
(in thousands) (in thousands)
Non-interest bearing $43,871 $37,150
N.O.W. checking 95,914 77,242
Savings 62,578 48,200
Money market accounts 48,702 41,652
Certificates of deposit under $100,000 115,166 93,750
Certificates of deposit $100,000 and over 33,711 21,576
-------- --------
Total Deposits $399,942 $319,570
======== ========
FHLB Advance Maturity Schedule
- ------------------------------
The Bank's Federal Home Loan Bank borrowings mature at various dates through
January 2011 and bear interest at rates ranging from 2.83% to 6.55%. Principal
reduction amounts due for future years ending September 30 are as follows
(dollars in thousands):
2005 $ 9,094
2006 10,591
2007 64
2008 15,070
2009 4,628
Thereafter 20,000
-------
Total $59,447
=======
A portion of these advances have a putable feature and may be called by the FHLB
earlier than the above schedule indicates.
20
Comparison of Operating Results for the Three and Six Months Ended March 31,
2005 and 2004
Net Income: Net income for the quarter ended March 31, 2005 increased to $1.45
million, or $0.40 per diluted share ($0.42 per basic share) from $1.42 million,
or $0.36 per diluted share ($0.38 per basic share) for the quarter ended March
31, 2004. The $.04 increase in earnings per share for the quarter ended March
31, 2005 was primarily a result of a $706,000 ($466,000 net of income tax -
$0.13 per diluted share) increase in net interest income after provision for
loan losses, a $127,000 ($84,000 net of income tax - $0.02 per diluted share)
increase in non-interest income, and a lower number of weighted average shares
outstanding which increased diluted earnings per share by approximately $0.03.
These items were partially offset by an $828,000 ($546,000 net of income tax -
$0.14 per diluted share) increase in non-interest expense.
Net income for the six months ended March 31, 2005 increased to $2.95 million,
or $0.80 per diluted share ($0.84 per basic share) from $2.81 million, or $0.71
per diluted share ($0.74 per basic share) for the six months ended March 31,
2004. The $.09 increase in diluted earnings per share for the six months ended
March 31, 2005 was primarily the result of a $1.36 million ($900,000 net of
income tax - $0.23 per diluted share) increase in net interest income after
provision for loan losses, a $553,000 ($365,000 net of income tax - $0.09 per
diluted share) increase in non-interest income, and a lower number of weighted
average shares outstanding which increased diluted earnings per share by
approximately $0.06. These items were partially offset by a $1.76 million ($1.16
million net of income tax - $0.29 per diluted share) increase in non-interest
expense.
Net Interest Income: Net interest income increased $696,000 to $5.52 million
for the quarter ended March 31, 2005 from $4.83 million for the quarter ended
March 31, 2004, primarily due to increased interest income from a larger
interest earning asset base. Total interest income increased $808,000 to $7.53
million for the quarter ended March 31, 2005 from $6.72 million for the quarter
ended March 31, 2004 as average total interest earning assets increased by
$59.93 million. The increased interest earning asset balances were a result of
investing the funds received in connection with the acquisition of deposits.
Partially offsetting the increased interest earning balances, was a reduction in
the yield on assets. The yield on earning assets was 6.30% for the quarter ended
March 31, 2005 compared to 6.43% for the quarter ended March 31, 2004. Total
interest expense increased by $112,000 to $2.00 million for the quarter ended
March 31, 2005 from $1.89 million for the quarter ended March 31, 2004 as
average interest bearing liabilities increased $67.84 million. Partially
offsetting the increased interest bearing liability levels was a decrease in the
average rate paid for these funding sources to 1.94% for the quarter ended March
31, 2005 from 2.20% for the quarter ended March 31, 2004. The net interest
margin remained level at 4.62% for the quarters ended March 31, 2005 and 2004.
Net interest income increased $1.30 million to $10.99 million for the six months
ended March 31, 2005 from $9.69 million for the six months ended March 31, 2004,
primarily due to increased interest income from a larger interest earning asset
base. Total interest income increased $1.37 million to $14.93 million for the
six months ended March 31, 2005 from $13.56 million for the six months ended
March 31, 2004 as average total interest earning assets increased by $55.50
million. The increased interest earning asset balances were a result of
investing the funds received in connection with the acquisition of deposits.
Partially offsetting the increased interest earning balances, was a reduction in
the yield on assets. The yield on earning assets was 6.30% for the six months
ended March 31, 2005 compared to 6.48% for the six months ended March 31, 2004.
Total interest expense increased by $67,000 to $3.94 million for the six months
ended March 31, 2005 from $3.87 million for the six months ended March 31, 2004
as average interest bearing liabilities increased $63.62 million. Partially
offsetting the increased interest bearing liability levels was a decrease in the
average rate paid for these funding sources to 1.93% for the six months ended
March 31, 2005 from 2.25% for the six months ended March 31, 2004. As a result
of these changes the net interest margin increased to 4.64% for the six months
ended March 31, 2005 from 4.63% for the six months ended March 31, 2004.
21
Provision for Loan Losses: The provision for loan losses for the quarter ended
March 31, 2005 decreased $20,000 from the quarter ended March 31, 2004 from
$30,000 for the quarter ended March 31, 2004. The provision for the six months
ended March 31, 2005 decreased to $20,000 from $80,000 for the six months ended
March 31, 2004. The sale of the Bank's credit card portfolio in December 2004
reduced the amount of the provision for the six months ended March 31, 2005
according to the Bank's comprehensive analysis. On a quarterly basis the Bank
performs an analysis taking into consideration historic loss experience for
various loan segments, collateral securing individual loans on non-accrual
status, changes in economic conditions, delinquency rates, and other factors to
determine the level of allowance for loan losses needed.
Based on its comprehensive analysis, management deemed the allowance for loan
losses of $4.01 million at March 31, 2005 (1.05% of loans receivable and 130.99%
of non-performing loans) adequate to provide for probable losses based on an
evaluation of known and inherent risks in the loan portfolio at that date. The
allowance for loan losses was $3.93 million (1.16% of loans receivable and 99.2%
of non-performing loans) at March 31, 2004. The Company had a net charge-off of
$7,000 for the current quarter compared to a net charge-off of $29,000 in the
same quarter of 2004. For the six months ended March 31, 2005 and 2004, net
charge-offs were $4,000 and $44,000, respectively. For additional information,
see the "Activity in the Allowance for Loan Losses" section included herein.
Non-interest Income: Total non-interest income increased $127,000 to $1.24
million for the quarter ended March 31, 2005 from $1.12 million for the quarter
ended March 31, 2004, primarily due to $192,000 increase in service charges on
deposits, a $69,000 distribution from one of the Bank's ATM network
associations, and a $66,000 increase in ATM transaction fees. The increased
service charges on deposits and the increased ATM transaction fees were
primarily a result of the increased transaction account base acquired through
the branch acquisition. The ATM network association distribution of $69,000 was
cash consideration paid to network association members in connection with the
association's recent merger. These increases were partially offset by a
$233,000 decrease in income from loan sales (gain on sale of loans and servicing
income (expense) on loans sold) as fewer loans were sold. The Bank sold $4.63
million in fixed rate one-to-four family mortgages during the quarter ended
March 31, 2005 compared to $12.62 million for the same period a year ago.
Total non-interest income increased by $553,000 to $2.68 million for the six
months ended March 31, 2005 from $2.13 million for the six months ended March
31, 2004, primarily due to a $440,000 increase in service charges on deposits, a
$114,000 increase in ATM transaction fees, and a $69,000 distribution from one
of the Bank's ATM network associations as discussed above. These increases
were partially offset by a $99,000 net decrease in income from loan sales (gain
on sale of loans and servicing income (expense) on loans sold.)
Non-interest Expense: Total non-interest expense increased by $828,000 to $4.67
million for the quarter ended March 31, 2005 from $3.84 million for the quarter
ended March 31, 2004, as the Bank operated with a larger branch network due to
the acquisition of seven branch offices and the associated employees in October
2004. The increase was primarily a result of a $314,000 increase in salaries
and employee benefits, a $101,000 increase in premises and equipment expenses, a
$94,000 core deposit intangible amortization expense, and a $49,000 increase in
postage and courier expense. Also impacting the quarterly comparison was an
$87,000 reduction in gains from the sale of real estate owned properties. The
Bank had income of $90,000 associated with the disposition of real estate owned
properties during the quarter ended March 31, 2004. The increased employee
expenses were primarily due to the larger employee base resulting from the
branch acquisition, annual salary adjustments, and increased medical insurance
costs.
Total non-interest expense increased by $1.76 million to $9.43 million for the
six months ended March 31, 2005 from $7.67 million for the six months ended
March 31, 2004. The increase was primarily a result of a $792,000 increase in
salaries and employee benefits, $183,000 in expenses associated with the branch
acquisition, a
22
$179,000 core deposit intangible amortization expense, a $150,000 increase in
premises and equipment expenses, a $115,000 increase in postage and courier
expense, and a $46,000 increase in professional and consulting fees.
The Company's efficiency ratio increased to 69.04% and 68.98% for the three and
six months ended March 31, 2005 from 64.66% and 64.90% for the three and six
months ended March 31, 2004. Directly impacting the current period's higher
ratios was the acquisition of seven branches as discussed earlier.
The Company also announced that it expects to incur additional expenses
associated with Sarbanes-Oxley requirements. The projected additional costs
total approximately $75,000 for the balance of the fiscal year in addition to
the costs associated with hiring an additional employee to assist with the
implementation and testing requirements.
Provision for Income Taxes: The provision for income taxes decreased to
$624,000 for the quarter ended March 31, 2005 from $647,000 for the quarter
ended March 31, 2004. The Company's effective tax rate was 30.1% for the
quarter ended March 31, 2005 and 31.3% for the quarter ended March 31, 2004.
The lower effective tax rate resulted primarily from a higher percentage of
tax-exempt income during the current quarter.
The provision for income taxes increased to $1.28 million for the six months
ended March 31, 2005 from $1.26 million for the six months ended March 31, 2004,
primarily due to increased income before taxes. The Company's effective tax
rate was 30.2% for the six months ended March 31, 2005 and 30.9% for the six
months ended March 31, 2004.
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, 2005. 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, interest
bearing deposits in banks, and federal funds sold decreased by $1.88 million to
$17.95 million at March 31, 2005 from $19.83 million at September 30, 2004. The
Company's liquid assets decreased primarily as a result of using a portion of
these funds to fund loan growth and purchase investment securities.
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, 2005, the Bank's regulatory liquidity
ratio (net cash, and short-term and marketable assets, as a percentage of net
deposits and short-term liabilities) was 10.7%. The Bank also maintained an
uncommitted credit facility with the FHLB-Seattle that provided for immediately
available
23
advances up to an aggregate amount of $154.58 million, under which $59.45
million was outstanding at March 31, 2005.
Liquidity management is both a short and long-term responsibility of the Bank's
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected loan sales,
(iii) expected deposit flows, and (iv) yields available on interest-bearing
deposits. Excess liquidity is invested generally in interest-bearing overnight
deposits, federal funds sold, and other short-term investments. If the Bank
requires funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB and collateral for repurchase agreements.
The Bank's primary investing activity is the origination of one-to-four family
mortgage loans, commercial mortgage loans, and construction and land development
loans. At March 31, 2005, the Bank had loan commitments totaling $31.29 million
and undisbursed loans in process totaling $40.44 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, 2005 totaled $104.75 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, 2005, 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 March 31, 2005 to
its minimum regulatory capital requirements at that date (dollars in thousands):
Percent of
Amount Adjusted Total Assets(1)
------ -----------------------
Tier 1 (leverage) capital $57,443 11.0%
Tier 1 (leverage) capital requirement 20,823 4.0
------- -----
Excess $36,620 7.0%
======= =====
Tier 1 risk adjusted capital $57,443 15.0%
Tier 1 risk adjusted capital requirement 15,350 4.0
------- -----
Excess $42,093 11.0%
======= =====
Total risk based capital $61,450 16.0%
Total risk based capital requirement 30,700 8.0
------- -----
Excess $30,750 8.0%
======= =====
___________________
(1) For the Tier 1 (leverage) capital, percent of total average assets of
$520.58 million. For the Tier 1 risk-based capital and total risk-based capital
calculations, percent of total risk-weighted assets of $383.74 million.
24
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS
(Dollars in thousands, except per share data)
Three Months Six Months
Ended March 31, Ended March 31,
2005 2004 2005 2004
---------------- ----------------
PERFORMANCE RATIOS:
Return on average assets (1) 1.10% 1.25% 1.12% 1.24%
Return on average equity (1) 7.95% 7.51% 8.06% 7.31%
Net interest margin (1) 4.62% 4.62% 4.64% 4.63%
Efficiency ratio 69.04% 64.66% 68.98% 64.90%
March 31, September 30,
2005 2004
-----------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 3,059 $ 1,442
REO & other repossessed assets 346 421
-------- ---------
Total non-performing assets $ 3,405 $ 1,863
-------- ---------
Non-performing assets to total assets 0.64% 0.40%
Allowance for loan losses to
non-performing loans 130.99% 276.77%
Book Value Per Share (2) $ 19.07 $ 18.7
Book Value Per Share (3) 20.57 20.28
Tangible Book Value Per Share (2)(4) 17.03 18.76
Tangible Book Value Per Share (3)(4) 18.37 20.28
______________________
(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 Six Months Ended
March 31, March 31,
2005 2004 2005 2004
------------------ ----------------
AVERAGE BALANCE SHEET:
- ---------------------
Average Total Loans $ 371,509 $ 338,694 $ 365,021 $ 337,642
Average Total Interest Earning
Assets 477,946 418,012 473,730 418,232
Average Total Assets 527,453 455,272 525,958 454,268
Average Total Interest Bearing
Deposits 357,825 286,792 352,740 285,218
Average FHLB Advances & Other
Borrowings 54,597 57,786 55,010 58,917
Average Shareholders' Equity 72,962 75,755 73,049 75,877
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There were no material changes in information concerning market risk from the
information provided in the Company's Form 10-K for the fiscal year ended
September 30, 2004.
Item 4. Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section
13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the participation
of the Company's Chief Executive Officer, Chief Financial Officer and
several other members of the Company's senior management as of the end
of the period covered by this report. The Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as currently in effect are effective
in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2005, the
Company did not make any significant changes in, nor take any material
corrective actions regarding, its internal controls or other factors
that could significantly affect these controls. A number of internal
control procedures were, however, modified during the quarter to
improve internal controls. The Company also continued to implement
suggestions from its internal auditor and independent auditor on ways
to strengthen existing controls.
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, Use of Proceeds and Issuer Purchases of Equity
Securities
- ------------------------------------------------------------------------------
The following table sets forth the shares repurchased by the Company during the
quarter:
Period Total No. Average Total No. of Maximum No.of
Of Shares Price Paid Shares Purchas- Shares that May
Purchased per Share ed as Part of Yet Be Purchased
Publicly Announc- Under the Plan
ed Plan
- -----------------------------------------------------------------------------
01/01/2005 - 94,310 $ 23.26 94,310 52,274(1)
01/31/2005
26
02/01/2005 - 10,500 23.20 10,500 41,774 (1)
02/28/2005
03/01/2005 - 41,774 23.44 41,774 -- (1)
03/31/2005
- -------------------------------------------------------------------------
Total 146,584 $ 23.33 146,584
(1) On March 15, 2005 the Company announced that it had completed its 12th
stock repurchase program and repurchased 360,670 shares, at an average price of
$23.04 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
- --------------------------------------------------------------
An annual meeting of Shareholders of the Company was held on January 25, 2005.
The results of the vote on the matters presented at the meeting are as follows:
1. The following individuals were elected as directors:
For Withheld
No. of Votes Percentage No. of Votes Percentages
------------------------- -------------------------
Richard R. Morris Jr. 3,431,860 98.31% 59,064 1.69%
(three-year term)
Jon C. Parker 3,166,17 290.70% 324,752 9.30%
(three-year term)
James C. Mason 3,436,722 98.45% 54,202 1.55%
(three-year term)
Item 5. Other Information
- -----------------------------
None to be reported.
Item 6. Exhibits
- -------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
3.3 Amendment to Bylaws (2)
10.1 Employee Severance Compensation Plan (3)
10.2 Employee Stock Ownership Plan (3)
10.3 1999 Stock Option Plan (4)
10.4 Management Recognition and Development Plan (4)
27
10.5 2003 Stock Option Plan (5)
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes Oxley Act
32 Certifications of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes Oxley Act
_________________
(1) Incorporated by reference to the Registrant's Registration
Statement on 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.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Timberland Bancorp, Inc.
Date: May 10, 2005 By: /s/ Michael R. Sand
----------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2005 By: /s/ Dean J. Brydon
----------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
29
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes Oxley Act
I, Michael R. Sand, certify that:
1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are likely to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 10, 2005 /s/ Michael R. Sand
-----------------------
Michael R. Sand
Chief Executive Officer
30
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes Oxley Act
I, Dean J. Brydon, certify that:
1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are likely to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 10, 2005 /s/ Dean J. Brydon
-----------------------
Dean J. Brydon
Chief Financial Officer
31
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF TIMBERLAND BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-Q, that:
* the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
* the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Michael R. Sand /s/ Dean J. Brydon
------------------------- ------------------------
Michael R. Sand Dean J. Brydon
Chief Executive Officer Chief Financial Officer
Date: May 10, 2005
32