UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to . ----- ----- Commission file number 0-23333 TIMBERLAND BANCORP, INC. (Exact name of registrant as specified in its charter) Washington 91-1863696 (State of Incorporation) (IRS Employer Identification No.) 624 Simpson Avenue, Hoquiam, Washington (Address of principal executive office) 98550 (Zip Code) (360) 533-4747 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS SHARES OUTSTANDING AT JULY 31, 2001 ----- ----------------------------------- common stock, $.01 par value 4,092,239
INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Shareholders' Equity 5 Consolidated Statements of Cash Flows 6-7 Consolidated Statements of Comprehensive Income 8 Notes to Consolidated Financial Statements (unaudited) 9-10 Item 2. Management's Discussion and Analysis of Financial Condition 11-20 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------ TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 and September 30, 2000 Dollars in Thousands (unaudited) June 30, September 30, 2001 2000 -------------------------------- Assets Cash and due from financial institutions $ 10,376 $ 8,893 Interest bearing deposits in banks 1,834 3,109 Investments and mortgage-backed securities (available for sale) 34,439 29,075 Loans receivable 303,648 287,303 Loans held for sale 12,445 28,343 Less: Allowance for loan losses (3,046) (2,640) -------------------------------- Total Loans 313,047 313,006 -------------------------------- Accrued interest receivable 1,807 1,756 Premises and equipment 10,267 8,614 Real estate owned 1,416 1,966 Other assets 1,388 1,661 -------------------------------- Total Assets $ 374,574 $ 368,080 -------------------------------- Liabilities and Shareholder's Equity Liabilities Deposits $ 228,992 $ 212,611 Federal Home Loan Bank advances 71,419 81,137 Other liabilities and accrued expenses 1,850 2,020 -------------------------------- Total Liabilities 302,261 295,768 -------------------------------- Shareholder's Equity Common Stock, $.01 par value; 50,000,000 shares authorized; June 30, 2001 - 4,524,255 issued, 4,092,239 outstanding September 30, 2000 - 4,793,295 issued, 4,361,279 outstanding (unallocated ESOP shares are not considered outstanding) 45 48 Additional paid in capital 38,591 42,250 Unearned shares issued to Employee Stock Ownership Trust (6,080) (6,477) Retained earnings 39,826 36,795 Accumulated other comprehensive loss (69) (304) -------------------------------- Total Shareholder's Equity 72,313 72,312 -------------------------------- Total Liabilities and Shareholder's Equity $ 374,574 $ 368,080 -------------------------------- See notes to unaudited consolidated financial statements 3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the three and nine months ended June 30, 2001 and 2000 Dollars in Thousands, Except Per Share Amounts (unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------ ------------------- Interest and Dividend Income Loans receivable $ 7,557 $ 6,971 $22,388 $19,270 Investments and mortgage-backed securities 164 295 672 899 Dividends from investments 224 174 580 535 Interest bearing deposits in banks 32 20 137 107 ------------------ ------------------- Total Interest and Dividend Income 7,977 7,460 23,777 20,811 ------------------ ------------------- Interest Expense Deposits 2,451 2,126 7,198 6,047 Federal Home Loan Bank advances 901 1,087 3,489 2,744 ------------------ ------------------- Total Interest Expense 3,352 3,213 10,687 8,791 ------------------ ------------------- Net Interest Income 4,625 4,247 13,090 12,020 Provision for Loan Losses 800 410 1,150 765 ------------------ ------------------- Net Interest Income After Provision For Loan Losses 3,825 3,837 11,940 11,255 ------------------ ------------------- Non-Interest Income Service charges on deposits 307 129 699 376 Gain on sale of loans, net 185 21 336 80 Market value adjustment on loans held for sale -- 306 175 (101) Gain (loss) on Sale of Securities (22) (2) 205 (15) Escrow fees 64 50 148 148 Servicing income (expense) on loans sold 121 1 170 (6) Other 202 142 530 387 ------------------ ------------------- Total Non-Interest Income 857 647 2,263 869 ------------------ ------------------- Non-Interest Expense Salaries and employee benefits 1,425 1,144 4,024 3,424 Premises and equipment 316 237 830 723 Advertising 270 107 681 302 Other 543 477 2,014 1,410 ------------------ ------------------- Total Non-Interest Expense 2,554 1,965 7,549 5,859 ------------------ ------------------- Income Before Income Taxes 2,128 2,519 6,654 6,265 Provision for Income Taxes 721 838 2,219 2,077 ------------------ ------------------- Net Income $ 1,407 $ 1,681 $ 4,435 $ 4,188 ------------------ ------------------- Earnings per common share: Basic $ 0.34 $ 0.38 $ 1.05 $ 0.92 Diluted $ 0.34 $ 0.38 $ 1.04 $ 0.92 Weighted average shares outstanding: Basic 4,097,184 4,393,512 4,223,414 4,545,092 Diluted 4,198,706 4,393,512 4,283,383 4,545,092 Dividends per share: $ 0.10 $ 0.09 $ 0.30 $ 0.25 See notes to unaudited consolidated financial statements 4
<TABLE> TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the year ended September 30, 2000 and the nine months ended June 30, 2001 Dollars in Thousands Except Common Stock Shares (unaudited) Unearned Shares Accumulated Issued to Other Employee Compre- Common Common Additional Stock hensive Stock Shares Stock Paid-In Ownership Retained Income Outstanding (1) Amount Capital Trust Earnings (Loss) Total --------------- ------ ------- ----- -------- ------ ------ <s> <c> <c> <c> <c> <c> <c> <c> Balance, Sept. 30, 1999 4,750,139 $52 $46,943 ($7,005) $32,646 $ (391) $72,245 Net Income -- -- -- -- 5,897 -- 5,897 Repurchase of Common Stock (424,127) (4) (4,599) -- -- -- (4,603) Cash Dividends ($.35 per share) -- -- -- - (1,748) -- (1,748) Earned ESOP Shares (2) 35,267 -- (94) 528 -- -- 434 Change in fair value of securities available for sale, net of tax -- -- -- -- -- 87 87 ----------------------------------------------------------------------------------- Balance, Sept. 30, 2000 4,361,279 48 42,250 (6,477) 36,795 (304) 72,312 ----------------------------------------------------------------------------------- Net Income -- -- -- -- 4,435 -- 4,435 Repurchase of Common Stock (269,040) (3) (3,616) -- -- -- (3,619) Cash Dividends ($.30 per share) -- -- -- - (1,404) -- (1,404) Earned ESOP Shares (2) -- -- (43) 397 -- -- 354 Change in fair value of securities available for sale, net of tax -- -- -- -- -- 235 235 ----------------------------------------------------------------------------------- Balance, June 30, 2001 4,092,239 $45 $38,591 ($6,080) $39,826 ($69) $72,313 ----------------------------------------------------------------------------------- - ------------------------------ (1) Unearned ESOP Shares are considered issued but not outstanding. (2) The release of ESOP shares resulted in a market value adjustment to additional paid in capital. See notes to unaudited consolidated financial statements 5 </TABLE>
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended June 30, 2001 and 2000 Dollars in Thousands (unaudited) Nine Months Ended June 30, 2001 2000 ------------------------- Cash Flow from Operating Activities Net income $ 4,435 $ 4,188 ------------------------- Noncash revenues, expenses, gains and losses included in income: Depreciation 338 315 Federal Home Loan Bank stock dividends (226) (161) Market value adjustment - loans held for sale (175) 101 Earned ESOP Shares 354 281 Gain on sale of securities available for sale (205) -- (Gain) Loss on sale of real estate owned, net (22) 14 Gain on sale of loans (336) (80) Provision for loan and real estate owned losses 1,465 815 Net (increase) decrease in loans originated for sale 16,409 4,762) Net (increase) decrease in other assets 102 (260) Decrease in other liabilities and accrued expenses, net (171) (183) ------------------------- Net Cash Provided by Operating Activities 21,968 268 Cash Flow from Investing Activities Net decrease (increase) in interest-bearing deposits in banks 1,275 (411) Purchase of securities available for sale (26,643) (1,731) Proceeds from maturities of securities available for sale 9,735 1,735 Proceeds from sale of securities available for sale 12,334 1,746 Increase in loans receivable, net (17,090) (38,026) Additions to premises and equipment (1,991) (1,224) Additions to real estate owned (1,506) (1,590) Proceeds from sale of real estate owned 1,763 271 ------------------------- Net Cash Used by Investing Activities (22,123) (39,230) Cash Flow from Financing Activities Increase in deposits, net 16,380 15,031 Increase (decrease) in Federal Home Loan Bank advances, net (9,719) 29,841 Repurchase of common stock (3,619) (3,822) Payment of Dividends (1,404) (1,264) ------------------------- Net Cash Provided by Financing Activities 1,638 39,786 Net Increase in Cash 1,483 824 Cash and Due from Financial Institutions Beginning of period 8,893 6,810 ------------------------- End of period $10,376 $ 7,634 ------------------------- See notes to unaudited consolidated financial statements (continued) 6
Nine Months Ended June 30, 2001 2000 ------------------------- Supplemental Disclosure of Cash Flow Information Income taxes paid $ 1,425 $ 2,275 Interest paid 10,677 8,560 Supplemental Disclosure of Noncash Investing Activities Loans transferred to real estate owned 994 1,863 Market value adjustment of securities held for sale, net of tax 235 (181) See notes to unaudited consolidated financial statements 7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and nine months June 30, 2001 and 2000 Dollars in Thousands (unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------ ----------------- Comprehensive Income: Net Income $1,407 $1,681 $4,435 $4,188 Change in fair value of securities available for sale, net of tax (49) 58 235 (181) ------------------ ----------------- Total Comprehensive Income $1,358 $1,739 $4,670 $4,007 ================== ================= See notes to unaudited 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 the 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 generally accepted accounting principles. 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 and nine months ended June 30, 2001 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 generally accepted accounting principles 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. In accordance with Statement of Position ("SOP") 93-6, Employers' Accounting for Employee Stock Ownership Plans (ESOP), issued by the American Institute of Certified Public Accountants, shares owned by the Bank's Employee Stock Ownership Plan that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. At June 30, 2001, there were 432,016 ESOP shares that had not been allocated. Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------- --------------------- Basic EPS computation Numerator - Net Income $1,407,000 $1,681,000 $4,435,000 $4,188,000 Denominator - Weighted average common shares outstanding 4,097,184 4,393,512 4,223,414 4,545,092 Basic EPS $ 0.34 $ 0.38 $ 1.05 $ 0.92 Diluted EPS computation Numerator - Net Income $1,407,000 $1,681,000 $4,435,000 $4,188,000 Denominator - Weighted average common shares outstanding 4,097,184 4,393,512 4,223,414 4,545,092 Effect of dilutive stock options 101,522 -- 59,969 -- ---------- ---------- ---------- ---------- Weighted average common shares and common stock equivalents 4,198,706 4,393,512 4,283,383 4,545,092 Diluted EPS $ 0.34 $ 0.38 $ 1.04 $ 0.92 (3) DIVIDEND On July 30, 2001, the Company announced a quarterly cash dividend of $0.11 per common share. The dividend is to be paid August 17, 2001, to shareholders of record as of the close of business August 3, 2001. (4) ACCOUNTING CHANGES None to be reported. 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 and nine months ended June 30, 2001. This report contains certain "forward-looking statements." The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with forward looking statements. These forward looking statements may describe future plans or strategies and include the Company's expectations of future financial results. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include competition in the financial services market for both deposits and loans, interest rate trends, the economic climate in the Company's market areas and the country as a whole, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Comparison of Financial Condition at June 30, 2001 and September 30, 2000 Total Assets: Total assets increased to $374.6 million at June 30, 2001 from $368.1 million at September 30, 2000, with the increase reflected in investments and mortgage-backed securities which increased $5.4 million, and premises and equipment, which increased $1.7 million. Cash and Due from Financial Institutions: Cash and due from financial institutions increased to $10.4million at June 30, 2001 from $8.9 million at September 30, 2000. Interest Bearing Deposits in Banks: Interest bearing deposits in banks decreased to $1.8 million at June 30, 2001 from $3.1 million at September 30, 2000. Investments and Mortgage-backed Securities: Investments and mortgage-backed securities increased to $34.4 million at June 30, 2001 from $29.1 million at September 30, 2000. The increase is primarily a result of the purchase of $10.0 million in mortgage-backed securities in connection with the Bank's asset liability management strategies, and was partially offset by redemptions to fund share repurchases, and scheduled amortization and prepayments. During the current quarter, the Bank converted $11.9 million in fixed rate loans held for sale to mortgage-backed securities. These newly created securities were then sold and the proceeds were used to purchase other mortgage-backed securities with shorter maturities. Loans Receivable, and Loans Held-for-sale, net of allowance for loan losses: Net loans receivable, including loans held-for-sale, remained constant at $313.0 million at June 30, 2001 as compared to September 30, 2000. This is primarily a result of the Company selling $8.5 million in fixed rate mortgage loans and converting $11.9 million in fixed rate mortgage loans held for sale to mortgage-backed securities during the current quarter. Loan originations for the quarter ended June 30, 2001 increased to $51.5 million from $30.9 million for the quarter ended March 31, 2001, and loans classified as held for sale decreased to $12.4 million at June 30, 2001 from $28.3 million at September 30, 2000. 11
Real Estate Owned ("REO"): Real estate owned decreased to $1.4 million at June 30, 2001 from $2.0 million at September 30, 2000. This decrease is primarily due to the sale of two retail space properties which were part of the Company's largest REO. The remaining portion of this REO, a convenience store with a gas station has been sold and is expected to close in August 2001. As of June 30, 2001 this REO had a balance of $310,000. Premises and Equipment: Premises and equipment increased by $1.7 million to $10.3 million at June 30, 2001 from $8.6 million at September 30, 2000. This increase is primarily due to construction costs for the Bank's Tumwater branch (Thurston County), which opened in March 2001, construction costs for the Bank's Tacoma branch (Pierce County) which opened in June 2001, and the purchase of a new check imaging system. Deposits: Deposits increased by 7.7% to $229.0 million at June 30, 2001 from $212.6 million at September 30, 2000, with the Bank's certificate of deposit accounts, checking accounts, passbook savings accounts, and money market accounts all indicating increases from September 30, 2000 totals. Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased by 12.0% to $71.4 million at June 30, 2001 from $81.1 million at September 30, 2000, as funds from increased deposits, loan sales, and the maturity of investment securities were used to pay down the level of advances. Shareholders' Equity: Total shareholders' equity remained constant at $72.3 million for June 30, 2001 as compared to September 30, 2000. The components of shareholders' equity were affected by the repurchase of 269,040 shares of the Company's stock for $3.6 million, the payment of $1.4 million in dividends to shareholders, net income of $4.4 million, a $235,000 recovery in the Accumulated Other Comprehensive Loss category, and a $397,000 reduction in the equity component related to the unearned shares issued to the Employee Stock Ownership Trust. On February 23, 2001 the Company announced a plan to repurchase 209,287 shares of the Company's stock. This marked the Company's eighth 5% stock repurchase plan. As of June 30, 2001, the Company had repurchased 93,500 shares at an average price of $13.495. The Company has now repurchased 2,088,245 (31.6%) of the 6,612,500 shares that were issued when the Company went public in January 1998. Non-performing Assets: Total non-performing assets increased to $6.3 million at June 30, 2001 from $5.6 million at September 30, 2000, primarily due to a $1.3 million increase in non-performing loans and was partially offset by a $550,000 decrease in REO's. The increase in non-performing loans is primarily due to a $1.8 million loan secured by commercial real estate being put on non-accrual status. The borrowers have put the commercial property up for sale. The Company's non-performing asset ratio to total asset ratio ("NPA") increased to 1.68% at June 30, 2001 from 1.52% at September 30, 2000. 12
Non Performing Assets - --------------------- The following table sets forth information with respect to the Company's nonperforming assets at June 30, 2001 and September 30, 2000. At June 30, At September 30, 2001 2000 -------------------------------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Mortgage loans: One-to-four family $ 1,222 $ 1,203 Commercial 2,088 551 Construction and land development 999 1,267 Land 345 233 Consumer loans 166 273 Commercial Business Loans 42 85 -------- -------- Total 4,862 3,612 Accruing loans which are contractually past due 90 days or more: Mortgage loans: Construction and land development -- -- -------- -------- Total -- -- -------- -------- Total of nonaccrual and 90 days past due loans 4,862 3,612 Real estate owned and other repossessed assets 1,416 1,966 -------- -------- Total nonperforming assets 6,278 5,578 Restructured loans -- -- Nonaccrual and 90 days or more past due loans as a percentage of loans receivable, (including loans held for sale)(1) 1.54% 1.14% Nonaccrual and 90 days or more past due loans as a percentage of total assets 1.30% 0.98% Nonperforming assets as a percentage of total assets 1.68% 1.52% Loans receivable, (including loans held for sale) (1) $316,093 $315,646 ======== ======== Total assets $374,574 $368,080 ======== ======== - --------------- (1) Loans receivable is before the allowance for loan losses 13
Loans Receivable - ---------------- The following table sets forth the composition of the Company's loan portfolio by type of loan. At June 30, At September 30, 2001 2000 Amount Percent Amount Percent --------------------- -------------------- (Dollars In thousands) Mortgage Loans: One-to-four family (1)(2) $124,686 35.34% $136,825 38.85% Multi family 29,451 8.35 33,604 9.54 Commercial 65,957 18.70 58,632 16.65 Construction and land development 94,741 26.85 89,903 25.52 Land 13,794 3.91 12,561 3.56 -------- ------ -------- ------ Total mortgage loans 328,629 93.15 331,525 94.12 Consumer Loans: Home equity and second mortgage 11,147 3.16 9,816 2.79 Other 7,081 2.01 6,081 1.72 -------- ------ -------- ------ 18,228 5.17 15,897 4.51 Commercial business loans 5,936 1.68 4,808 1.37 -------- ------ -------- ------ Total loans 352,793 100.00% 352,230 100.00% ======= ======= Less: Undisbursed portion of loans in process (33,304) (32,831) Unearned income (3,396) (3,578) Allowance for loan losses (3,046) (2,640) Market value adjustment of loans held-for-sale -- (175) -------- -------- Total loans receivable, net $313,047 $313,006 ======== ======== - ---------------- (1) Includes loans held-for-sale. (2) Includes real estate contracts totaling $1.2 million at June 30, 2001. 14
Deposit Breakdown - ----------------- The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated. At June 30, 2001 At September 30, 2000 ---------------- --------------------- (in thousands) (in thousands) Non-interest bearing $ 15,537 $ 15,497 N.O.W. checking 28,109 24,467 Passbook savings 32,002 28,647 Money market accounts 23,709 20,863 Certificates of deposit under $100,000 87,793 80,717 Certificates of deposit $100,000 and over 41,842 42,420 -------- -------- Total Deposits $228,992 $212,611 ======== ======== Comparison of Operating Results for the Three Months Ended June 30, 2001 and 2000 Net Income: Net income for the three months ended June 30, 2001 was $1.4 million, or $0.34 per diluted share ($0.34 per basic share) compared to $1.7 million or $0.38 per diluted share ($0.38 per basic share) for the three months ended June 30, 2000. Income for the current quarter was reduced by an $800,000 provision for loan losses, which was $390,000 higher then the prior year provision, and by an increase in non-interest expense of $589,000. These increased expenses were partially offset by the $150,000 recovery of a kiting-related non-sufficient fund expense (NSF), a $164,000 increase in gain on sale of loans, a $120,000 increase in servicing income on loans sold, and a $378,000 increase in net interest income. Income for the quarter ended June 30, 2000 had been increased by a $306,000 market value recovery on loans held for sale and the receipt of $290,000 of delinquent interest and fee income on a large non-performing asset. Net Interest Income: Net interest income increased 8.9% to $4.6 million for the three months ended June 30, 2001 from $4.2 million for the three months ended June 30, 2000. Total interest and dividend income increased $517,000 to $8.0 million for the three months ended June 30, 2001 from $7.5 million for the three months ended June 30, 2000, primarily as a result of the Bank's larger loan portfolio. Average loans increased to $326.1 million for the quarter ended June 30, 2001 from $295.6 million for the quarter ended June 30, 2000. The $586,000 increase in loan interest is partially offset by a $69,000 net decrease in interest and dividends from investment securities and financial institutions. The net decrease in interest and dividends from investment securities and financial institutions is primarily a result of lower average balances for the quarter in investment securities and in funds held with financial institutions primarily due to redemptions to fund share repurchases and scheduled amortization and prepayments. 15
Total interest expense increased 4.3% to $3.4 million for the three months ended June 30, 2001 from $3.2 million for the three months ended June 30, 2000. This increase is primarily a result of a $325,000 increase in interest paid on customer deposits and a $186,000 decrease in interest paid on FHLB advances. Net interest margin remained constant at 5.21% for the three months ended June 30, 2001 and 2000. However, net interest margin for the current quarter increased by 28 basis points from the 4.93% for the quarter ended March 31, 2001, primarily as a result of the Company's short-term FHLB advances re-pricing downward at maturity and the reduction in average FHLB borrowings for the quarter. Provision for Loan Losses: The provision for loan losses for the three months ended June 30, 2001 was $800,000 compared to $410,000 for the three months ended June 30, 2000. Management determined the general loan loss reserves of $3.1 million at June 30, 2001 (0.96% of loans receivable and loans held for sale and 62.7% of non-performing loans) was adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. Net charge-offs for the current quarter were $587,000 compared to a net recovery of $30,000 in the same quarter of 2000. The current quarter's charge-offs were primarily the result of two related commercial business loans being written off. Noninterest Income: Total noninterest income increased to $857,000 for the three months ended June 30, 2001 from $647,000 for the three months ended June 30, 2000. This increase is primarily due to a $178,000 increase in service charges on deposits, a $164,000 increase in gain on sale of loans, and a $120,000 increase in servicing income on loans sold. These increases were partially offset by a $306,000 net change in the market value adjustment on loans held for sale. Noninterest Expense: Total noninterest expense increased to $2.6 million for the three months ended June 30, 2001 from $2.0 million for the three months ended June 30, 2000. This increase is primarily due to a $281,000 increase in salary and employee benefit expense, a $163,000 increase in advertising expense, and a $79,000 increase in premises and equipment expenses. The increase in salary and employee benefit expense is primarily a result of adding employees to staff the Bank's new branches (Tumwater and Tacoma) and hiring additional commercial loan staff to manage the Bank's business banking activities. The increase in advertising expense is primarily a result of $141,000 in advertising expenses related to the new checking account acquisition program. These expense increases were partially offset by the recovery in the current quarter of the $150,000 kiting related NSF expense that the Company incurred during the quarter ended September 30, 2000. Provision for Income Taxes: The provision for income taxes decreased to $721,000 for the three months ended June 30, 2001 from $838,000 for the three months ended June 30, 2000 primarily as a result of lower income before income taxes. Other. On July 26, 2001 shares were awarded under the Company's Management Recognition and Development Plan to managers and directors of the Company. For further information concerning the estimated expense related to the Company's Management Recognition and Development Plan on future periods, see Part II, Item 5. Comparison of Operating Results for the Nine Months Ended June 30, 2001 and 2000 Net Income: Net income for the nine months ended June 30, 2001 was $4.4 million, or $1.04 per diluted share ($1.05 per basic share) compared to $4.2 million, or $0.92 per diluted share ($0.92 per basic share) for the nine months ended June 30, 2000. Income for the current nine months was increased by a $205,000 gain on sale of securities, a $175,000 market value recovery on loans held for sale, a $150,000 recovery of a kiting-related NSF expense, $336,000 in gains on sale of loans and $170,000 in servicing income on loans sold. Income for the current nine months was reduced by increased loan loss provisions and $315,000 in REO market value writedowns. Net interest income for the current nine months was $1.1 million higher than a year earlier, and 16
non-interest expense was up $1.7 million from the same period a year ago. Income for the nine months ended June 30, 2000 was reduced by a $101,000 market value writedown on loans held for sale and was increased by the receipt of $290,000 of delinquent interest and fees on a non-performing asset. On July 26, 2001 shares were awarded under the Company's Management Recognition and Development Plan to managers and directors of the Company. For further information concerning the estimated expense related to the Company's Management Recognition and Development Plan on future periods, see Part II, Item 5. Net Interest Income: Net interest income increased $1.1 million to $13.1 million for the nine months ended June 30, 2001 from $12.0 million for the nine months ended June 30, 2000. Total interest and dividend income increased 14.3% to $23.8 million for the nine months ended June 30, 2001 from $20.8 million for the nine months ended June 30, 2000. The increase is primarily a result of a $3.1 million increase in interest from loans receivable and is partially offset by a $152,000 net decrease in interest and dividends from investment securities and financial institutions. The increase in interest income from loans receivable is primarily a result of higher average balances for the period due to loan growth, as average loan balances increased to $322.8 million for the nine months ended June 30, 2001 from $281.8 million for the nine months ended June 30, 2000. The net decrease in interest and dividends from investments securities and financial institutions is primarily a result of lower average balances for the nine months in investment securities and in funds held with financial institutions due to redemptions to fund share repurchases and scheduled amortization and prepayments. Total interest expense increased 21.6% to $10.7 million for the nine months ended June 30, 2001 from $8.8 million for the nine months ended June 30, 2000. This increase is primarily a result of a $745,000 increase in interest paid on FHLB advances and a $1.2 million increase in interest paid on customer deposits arising from increases in both average rates paid and outstanding balances. The net interest margin was 4.94% for the nine months ended June 30, 2001 compared to a net interest margin of 5.08% for the nine months ended June 30, 2000. Provision for Loan Losses: The provision for loan losses for the nine months ended June 30, 2001 was $1.2 million compared to $765,000 for the nine months ended June 30, 2000. Management deemed the general loan loss reserves of $3.1 million at June 30, 2001 (.96% of loans receivable and loans held for sale, and 62.7% 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. Net charge-offs for the nine months ended June 30, 2001 and 2000 were $744,000 and $281,000 respectively. Noninterest Income: For the nine months ended June 30, 2001, noninterest income increased $1.4 million to $2.3 million, due primarily to a $323,000 increase in service charge on deposits, a $276,000 net change in the market value adjustment on loans held for sale, a $256,000 increase in gain on sale of loans, a $220,000 increase in gain on sales of securities, and a $176,000 increase in servicing income on loans sold. Noninterest Expense: Total noninterest expense increased to $7.5 million for the nine months ended June 30, 2001 from $5.9 million for the nine months ended June 30, 2000. This increase is primarily due to a $600,000 increase in salary and employee benefits, a $379,000 increase in advertising expense, a $300,000 increase in REO related expenses, and a $107,000 increase in premises and equipment expenses. Partially offsetting these expense increases was the $150,000 recovery a kiting-related NSF expense. 17
On July 26, 2001 shares were awarded under the Company's Management Recognition and Development Plan to managers and directors of the Company. For further information concerning the estimated expense related to the Company's Management Recognition and Development Plan on future periods, see Part II, Item 5. Provision for Income Taxes: The provision for income taxes increased to $2.2 million for the nine months ended June 30, 2001 from $2.1 million for the nine months ended June 30, 2000 primarily as a result of higher income before income taxes. 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. The Company also raised $65.0 million in net proceeds from the January 1998 stock offering. 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 Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At June 30, 2001, 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 21.0%. The Bank also maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of $127.4 million, under which $71.4 million was outstanding at June 30, 2001. Liquidity management is both a short and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (I) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral for repurchase agreements. The Bank's primary investing activity is the origination of one-to-four family mortgage loans and construction and land development loans. At June 30, 2001, the Bank had loan commitments totaling $16.7 million and undisbursed loans in process totaling $33.3 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from June 30, 2001 totaled $111.3 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 June 30, 2001, the Bank was in compliance with all applicable capital requirements. For additional details see "Regulatory Capital". 18
Regulatory Capital - ------------------ The following table compares the Bank's regulatory capital at June 30, 2001 to its minimum regulatory capital requirements at that date (dollars in thousands): Percent of Amount Adjusted Total Assets (1) ------ ------------------------- Tier 1 (leverage) capital $61,374 16.7% Tier 1 (leverage) capital requirement 14,671 4.0 ------- ---- Excess $46,703 12.7% ======= ===== Tier 1 risk adjusted capital $61,374 23.3% Tier 1 risk adjusted capital requirement 10,544 4.0 ------- ---- Excess $50,830 19.3% ======= ===== Total risk based capital $64,420 24.4% Total risk based capital requirement 21,089 8.0 ------- ---- Excess $43,331 16.4% ======= ===== - ------------------ (1) For the Tier 1 (leverage) capital, percent of total average assets of $366.8 million. For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $263.6 million. 19
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES KEY FINANCIAL RATIOS (Dollars in thousands, except per share data) Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------ ----------------- PERFORMANCE RATIOS: Return on average assets (1) 1.52% 1.97% 1.60% 1.70% Return on average equity (1) 7.84% 9.52% 8.17% 7.84% Net interest margin (1) 5.21% 5.21% 4.94% 5.08% Efficiency ratio 46.59% 40.15% 49.17% 45.46% June 30, September 30, 2001 2000 ------------------------------- ASSET QUALITY RATIOS: Non-performing loans $ 4,862 $ 3,612 REO & other repossessed assets 1,416 1,966 Total non-performing assets 6,278 5,578 Non-performing assets to total assets 1.68% 1.52% Allowance for loan losses to non-performing loans 62.65% 73.09% Book Value Per Share (2) $ 15.98 $ 15.09 Book Value Per Share (3) $ 17.56 $ 16.58 - ---------------------- (1) Annualized (2) Calculation includes ESOP shares not committed to be released (3) Calculation excludes ESOP shares not committed to be released Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------- ----------------- AVERAGE BALANCE SHEET: Average Total Loans $ 326,099 $ 295,556 $ 322,847 $ 281,792 Average Total Interest Earning Assets 354,907 325,975 353,375 314,980 Average Total Assets 371,107 341,132 368,505 329,215 Average Total Interest Bearing Deposits 213,488 187,319 201,718 187,319 Average FHLB Advances 67,139 69,215 77,057 60,697 Average Shareholders' Equity 71,814 70,683 72,352 71,212 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, 2000. 20
PART II. OTHER INFORMATION Item 1. Legal Proceedings - ---------------------------- Neither the Company nor the Bank is a party to any material legal proceedings at this time. Further, neither the Company nor the Bank is aware of the threat of any such proceedings. From time to time, the Bank is involved in various claims and legal actions arising in the ordinary course of business. Item 2. Changes in Securities and Use of Proceeds - --------------------------------------------------- Change in Securities -- None to be reported. Use of proceeds -- None to be reported. Item 3. Defaults Upon Senior Securities - ----------------------------------------- None to be reported. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- None to be reported. Item 5. Other Information - --------------------------- The Company's Board of Directors also announced that 204,927 shares were awarded from authorized but unissued shares to Management and Directors under the Company's Management Recognition and Development Plan ("MRDP"), which was adopted by the Board of Directors on November 10, 1998 and approved by 80.47% of the voting shareholders on January 25, 1999. The MRDP shares were awarded on July 26, 2001 and 20% of the shares will vest during the quarter ending September 30, 2001. The remainder of these shares will vest in 20% increments over the next four years. The Company estimates that it will incur MRDP related expenses of approximately $0.13 per share during the September 30, 2001 quarter due to the vesting of the shares. Thereafter, the Company estimates that it will incur MRDP expenses of approximately $0.032 per quarter through June 30, 2005. Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------ (a) Exhibits 3(a) Articles of Incorporation of the Registrant * 3(b) Bylaws of the Registrant * 10(a) Employee Severance Compensation Plan ** 10(b) Timberland Savings Bank, S.S.B. Employee Stock Ownership Plan ** 10(c) Timberland Bancorp, Inc. 1999 Stock Option Plan *** 10(d) Timberland Bancorp, Inc. Management Recognition and Development Plan *** _________________ * Incorporated by reference to the Registrant's Registration Statement of Form S-1 (333-35817). ** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997. *** Incorporated by reference to the Registrant's Annual Meeting Proxy Statement dated December 15, 1998. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2001. 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: August 9, 2001 By: /s/ Clarence E. Hamre ------------------------- Clarence E. Hamre President and Chief Executive Officer (Principal Executive Officer) Date: August 9, 2001 By: /s/ Dean J. Brydon ------------------------- Dean J. Brydon Chief Financial Officer (Principal Financial Officer) 22