UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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 FEBRUARY 5, 2002 ----- -------------------------------------- common stock, $.01 par value 3,898,856
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 and Results of Operations 11-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------ TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and September 30, 2001 Dollars in Thousands (unaudited) December 31, September 30, 2001 2001 ------------------------ Assets Cash and due from financial institutions $ 8,425 $ 10,017 Interest bearing deposits in banks 1,948 3,422 Investments and mortgage-backed securities (available for sale) 38,896 29,369 Federal Home Loan Bank stock 4,915 4,830 Loans receivable 307,822 308,796 Loans held for sale 6,081 18,022 Less: Allowance for loan losses (3,352) (3,050) ------------------------ Total Loans 310,551 323,768 ------------------------ Accrued interest receivable 1,633 1,880 Premises and equipment 11,275 10,660 Real estate owned 1,030 1,006 Other assets 1,712 1,353 ------------------------ Total Assets $380,385 $386,305 ------------------------ Liabilities and Shareholders' Equity Liabilities Deposits $240,761 $242,372 Federal Home Loan Bank ("FHLB") advances 66,036 68,978 Other liabilities and accrued expenses 2,297 3,146 ------------------------ Total Liabilities 309,094 314,496 ------------------------ Shareholders' Equity Common Stock, $.01 par value; 50,000,000 shares authorized; December 31, 2001 - 4,459,995 issued, 3,899,303 outstanding September 30, 2000 - 4,570,995 issued, 4,010,303 outstanding (unallocated ESOP shares and unvested MRDP shares are not considered outstanding) 45 46 Additional paid in capital 37,873 39,574 Unearned shares - Employee Stock Ownership Plan (5,816) (5,948) Unearned shares - Management Recognition & Development Plan (2,310) (2,471) Retained earnings 41,536 40,332 Accumulated other comprehensive income (loss) (37) 276 ------------------------ Total Shareholders' Equity 71,291 71,809 ------------------------ Total Liabilities and Shareholders' Equity $380,385 $386,305 ------------------------ See notes to unaudited consolidated financial statements 3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the three months ended December 31, 2001 and 2000 Dollars in Thousands, Except Per Share Amounts (unaudited) Three Months Ended December 31, 2001 2000 ----------------------- Interest and Dividend Income Loans receivable $ 7,348 $ 7,451 Investments and mortgage-backed securities 412 276 Dividends from investments 160 179 Interest bearing deposits in banks 21 49 ----------------------- Total interest and dividend income 7,941 7,955 ----------------------- Interest Expense Deposits 2,102 2,389 Federal Home Loan Bank advances 860 1,427 ----------------------- Total interest expense 2,962 3,816 ----------------------- Net interest income 4,979 4,139 Provision for loan losses 392 150 ----------------------- Net interest income after provision for loan losses 4,587 3,989 ----------------------- Non-Interest Income Service charges on deposits 403 165 Gain on sale of loans, net 280 68 Market value adjustment on loans held for sale -- 175 Gain on sale of securities 3 -- Escrow fees 73 39 Servicing income on loans sold 136 19 Other 266 142 ----------------------- Total non-interest income 1,161 608 ----------------------- Non-Interest Expense Salaries and employee benefits 1,707 1,277 Premises and equipment 320 252 Advertising 241 177 Other 838 586 ----------------------- Total non-interest expense 3,106 2,292 ----------------------- Income before income taxes 2,642 2,305 Provision for income taxes 936 764 ----------------------- Net Income $ 1,706 $ 1,541 Earnings per common share: Basic $ 0.43 $ 0.35 Diluted $ 0.42 $ 0.35 Weighted average shares outstanding: Basic 3,985,244 4,344,159 Diluted 4,087,192 4,351,147 Dividends per share: $ 0.11 $ 0.10 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, 2001 and the three months ended December 31, 2001 Dollars in Thousands Except Common Stock Shares (unaudited) Unearned Unearned Shares Shares Accumu- Issued to Issued to lated Employee Manage- Other Addi- Stock ment Compre- Common Stock Common tional Owner- Recog- hensive Shares Out- Stock Paid-In ship nition Retained Income standing (1) Amount Capital Trust Plan Earnings (Loss) Total ------------ ------ ------- ----- ---- -------- ------ ----- <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, Sept. 30, 2000 4,361,279 $48 $42,250 ($6,477) $ -- $36,795 $ (304) $72,312 Net Income -- -- -- -- -- 5,462 -- 5,462 Issuance of MRDP Shares -- 2 3,222 -- (3,224) -- -- -- Repurchase of Common Stock (428,827) (4) (5,914) -- -- -- -- (5,918) Exercise of Stock Options 1,600 -- 19 -- -- -- -- 19 Cash Dividends ($.41 per share) -- -- -- -- -- (1,925) -- (1,925) Earned ESOP Shares 35,266 -- (26) 529 -- -- -- 503 Earned MRDP Shares 40,985 -- 23 -- 753 -- -- 776 Change in fair value of securities available for sale, net of tax -- -- -- -- -- -- 580 580 ------------------------------------------------------------------------------ Balance, Sept. 30, 2001 4,010,303 46 39,574 (5,948) (2,471) 40,332 276 71,809 ------------------------------------------------------------------------------ Net Income -- -- -- -- -- 1,706 -- 1,706 Repurchase of Common Stock (115,000) (1) (1,763) -- -- -- -- (1,764) Exercise of Stock Options 4,000 -- 48 -- -- -- -- 48 Cash Dividends ($.11 per share) -- -- -- -- -- (502) - (502) Earned ESOP Shares -- -- (4) 132 -- -- -- 128 Earned MRDP Shares -- -- 18 -- 161 -- -- 179 Change in fair value of securities available for sale, net of tax -- -- -- -- -- -- (313) (313) ------------------------------------------------------------------------------ Balance, Dec. 31, 2001 3,899,303 $45 $37,873 ($5,816) ($2,310) $41,536 ($37) $71,291 ------------------------------------------------------------------------------ See notes to unaudited consolidated financial statements 5 </TABLE>
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended December 31, 2001 and 2000 Dollars in Thousands (unaudited) Three Months Ended December 31, 2001 2000 --------------------- Cash Flow from Operating Activities Net income $1,706 $1,541 --------------------- Noncash revenues, expenses, gains and losses included in income: Depreciation 150 114 Federal Home Loan Bank stock dividends (85) (71) Market value adjustment - loans held for sale -- (175) Earned ESOP Shares 128 107 Earned MRDP Shares 179 -- Gain on sale of securities available for sale (3) -- Gain on sale of real estate owned, net (3) (13) Gain on sale of loans (280) (68) Provision for loan and real estate owned losses 412 150 Net decrease (increase) in loans originated for sale (5) 2,179 Net decrease in other assets 48 34 Decrease (increase) in other liabilities and accrued expenses, net (849) 317 --------------------- Net Cash Provided by Operating Activities 1,398 4,115 Cash Flow from Investing Activities Net decrease (increase) in interest-bearing deposits in banks 1,474 (142) Purchase of securities available for sale -- (369) Proceeds from maturities of securities available for sale 1,151 707 Proceeds from sale of securities available for sale 1,078 -- Decrease (increase) in loans receivable, net 884 (1,293) Additions to premises and equipment (765) (597) Additions to real estate owned (360) (46) Proceeds from sale of real estate owned 319 77 --------------------- Net Cash Provided by (Used in) Investing Activities 3,781 (1,663) Cash Flow from Financing Activities Decrease in deposits, net (1,611) (3,348) Increase (decrease) in Federal Home Loan Bank advances, net (2,942) 3,562 Proceeds from exercise of stock options 48 -- Repurchase of common stock (1,764) (549) Payment of dividends (502) (479) --------------------- Net Cash Used by Financing Activities (6,771) (814) Net Increase (decrease) in Cash (1,592) 1,638 Cash and Due from Financial Institutions Beginning of period 10,017 8,893 --------------------- End of period $ 8,425 $10,531 --------------------- See notes to unaudited consolidated financial statements (continued) 6
Three Months Ended December 31, 2001 2000 --------------------- Supplemental Disclosure of Cash Flow Information Income taxes paid $ 660 $ -- Interest paid 3,123 3,733 Supplemental Disclosure of Noncash Investing Activities Market value adjustment of securities held for sale, net of tax (313) 314 Investment securities acquired in loan securitization 12,226 -- See notes to unaudited consolidated financial statements 7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three months ended December 31, 2001 and 2000 Dollars in Thousands (unaudited) Three Months Ended December 31, 2001 2000 --------------------- Comprehensive Income: Net Income $1,706 $1,541 Change in fair value of securities available for sale, net of tax (313) 314 --------------------- Total Comprehensive Income $1,393 $1,855 --------------------- 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 ended December 31, 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 and awarded but not released Management Recognition and Development Plan ("MRDP") shares. In accordance with Statement of Position ("SOP") 93-6, Employers' Accounting for Employee Stock Ownership Plans (ESOP), issued by the American Institute of Certified Public Accountants, shares owned by the Bank's Employee Stock Ownership Plan that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. At December 31, 2001, there were 396,750 ESOP shares that had not been allocated. Three Months Ended December 31, 2001 2000 -------------------------------- Basic EPS computation Numerator - Net Income $ 1,706,000 $ 1,541,000 Denominator - Weighted average common shares outstanding 3,985,244 4,344,159 Basic EPS $ 0.43 $ 0.35 Diluted EPS computation Numerator - Net Income $ 1,706,000 $ 1,541,000 Denominator - Weighted average common shares outstanding 3,985,244 4,344,159 Effect of dilutive stock options 99,824 6,988 Effect of dilutive MRDP 2,124 -- ----------- ----------- Weighted average common shares and common stock equivalents 4,087,192 4,351,147 Diluted EPS $ 0.42 $ 0.35 (3) DIVIDEND On January 10, 2002, the Company announced a quarterly cash dividend of $0.11 per common share. The dividend is to be paid February 15, 2002, to shareholders of record as of the close of business February 1, 2002. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - ------------------------------------------------------------------------ The following analysis discusses the material changes in the financial condition and results of operations of the Company at and for the three months ended December 31, 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 December 31, 2001 and September 30, 2001 Total Assets: Total assets decreased by $5.9 million to $380.4 million at December 31, 2001 from $386.3 million at September 30, 2001. The change is primarily reflected in an $11.9 million decrease in loans held for sale and a $3.1 million decrease in cash and interest bearing deposits in banks. These decreases are partially offset by a $9.5 million increase in investments and mortgage-backed securities. Cash and Due from Financial Institutions: Cash and due from financial institutions decreased to $8.4 million at December 31, 2001 from $10.0 million at September 30, 2001. Interest Bearing Deposits in Banks: Interest bearing deposits in banks decreased to $1.9 million at December 31, 2001 from $3.4 million at September 30, 2001. Investments and Mortgage-backed Securities: Investments and mortgage-backed securities increased to $38.9 million at December 31, 2001 from $29.4 million at September 30, 2001. The increase is primarily a result of the Bank converting $12.2 million in fixed rate loans held for sale to mortgage-backed securities, and is partially offset by scheduled amortization and prepayments. The securitization of fixed rate mortgage loans held for sale continues the Company's practice first begun in fiscal year 2001, which changes the character of such loans to investments from loans. Loans Receivable, and Loans Held-for-sale, net of allowance for loan losses: Net loans receivable, including loans held-for-sale, decreased 4.1% to $310.6 million at December 31, 2001 from $323.8 at September 30, 2001, primarily due to the conversion of $12.2 million of the Bank's loans held for sale to mortgage-backed securities and the sale of $17.2 million in fixed rate one-to-four family mortgage loans. As a result of these transactions, one-to-four family mortgage loans in the Company's portfolio decreased by $12.6 million. Real Estate Owned ("REO"): Real estate owned remained constant at $1.0 million for December 31, 2001 as compared to September 30, 2001. 11
Premises and Equipment: Premises and equipment increased by $615,000 to $11.3 million at December 31, 2001 from $10.7 million at September 30, 2001. This increase is primarily due to the purchase of a building in Olympia (Pierce County) for a future branch and the acquisition of a building in Hoquiam (Grays Harbor County) for future office space. Deposits: Deposits decreased by 0.7% to $240.8 million at December 31, 2001 from $242.4 million at September 30, 2001, primarily due to a $6.4 million decrease in the Bank's certificate of deposit accounts. The total of certificates of deposit over $100,000 decreased $13.6 million, while certificates under $100,000 increased $7.2 million. With the proceeds from loan sales and the increase in smaller denomination certificates of deposit, the Bank was able to reduce its reliance on the higher rate, larger denomination deposits. This decrease is partially offset by a $3.0 million increase in money market accounts and a $1.7 million increase in N.O.W checking accounts. Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased by 4.3% to $66.0 million at December 31, 2001 from $69.0 million at September 30, 2001, as funds from loan sales and loan payoffs were used to pay down the level of advances. Shareholders' Equity: Total shareholders' equity decreased by $518,000 to $71.3 million at December 31, 2001 from $71.8 million at September 30, 2001. The components of shareholders' equity were affected by the repurchase of 115,000 shares of the Company's stock for $1.8 million, net income of $1.7 million, the payment of $502,000 in dividends to shareholders, and a $313,000 decrease in the Accumulated Other Comprehensive Income category. Also affecting shareholders' equity was a $132,000 increase in the equity component related to the unearned shares issued to the Employee Stock Ownership Plan and a $161,000 increase in the equity component related to unearned shares issued to the Management Recognition and Development Plan. On September 24, 2001 the Company announced a plan to repurchase 200,872 shares of the Company's stock. This marked the Company's ninth 5% stock repurchase plan. As of December 31, 2001, the Company had repurchased 159,000 of these shares. The Company has repurchased a total of 2,363,032 (35.7%) of the 6,612,500 shares that were issued when the Company went public in January 1998. Non-performing Assets: Total non-performing assets decreased to $4.3 million at December 31, 2001 from $5.1 million at September 30, 2001, primarily due to a $774,000 decrease in non-performing loans. The Company's non-performing asset ratio to total asset ratio ("NPA") decreased to 1.14% at December 31, 2001 from 1.32% at September 30, 2001. 12
Non Performing Assets - --------------------- The following table sets forth information with respect to the Company's nonperforming assets at December 31, 2001 and September 30, 2001. At December 31, At September 30, 2001 2001 -------------------------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Mortgage loans: One-to-four family $ 1,013 $ 863 Commercial 891 2,091 Construction and land development 724 491 Land 563 610 Consumer loans 69 26 Commercial Business Loans 57 10 -------- -------- Total 3,317 4,091 Accruing loans which are contractually past due 90 days or more: Mortgage loans: -- -- Total of nonaccrual and 90 days past due loans 3,317 4,091 Real estate owned and other repossessed assets 1,030 1,006 -------- -------- Total nonperforming assets 4,347 5,097 Restructured loans -- -- Nonaccrual and 90 days or more past due loans as a percentage of loans receivable, (including loans held for sale)(1) 1.06% 1.25% Nonaccrual and 90 days or more past due loans as a percentage of total assets 0.87% 1.06% Nonperforming assets as a percentage of total assets 1.14% 1.32% Loans receivable, (including loans held for sale) (1) $313,903 $326,818 ======== ======== Total assets $380,385 $386,305 ======== ======== - ------------ (1) Loans receivable is before the allowance for loan losses 13
Loans Receivable - ---------------- The following table sets forth the composition of the Company's loan portfolio by type of loan. At December 31, At September 30, 2001 2001 Amount Percent Amount Percent ------------------ ------------------- (Dollars In thousands) Mortgage Loans: One-to-four family (1)(2) $117,513 33.29% $130,082 35.14% Multi family 25,445 7.21 29,412 7.95 Commercial 67,297 19.06 65,731 17.76 Construction and land development 102,343 28.99 106,244 28.71 Land 14,730 4.17 13,632 3.68 -------- ------ -------- ------ Total mortgage loans 327,328 92.72 345,101 93.24 Consumer Loans: Home equity and second mortgage 9,704 2.75 11,039 2.98 Other 7,131 2.01 6,825 1.85 -------- ------ -------- ------ 16,835 4.76 17,864 4.83 Commercial business loans 8,894 2.52 7,150 1.93 -------- ------ -------- ------ Total loans 353,057 100.00% 370,115 100.00% ====== ====== Less: Undisbursed portion of loans in process (35,875) (39,803) Unearned income (3,279) (3,494) Allowance for loan losses (3,352) (3,050) Market value adjustment of loans held-for-sale -- -- -------- -------- Total loans receivable, ne $310,551 $323,768 ======== ======== - ------------- (1) Includes loans held-for-sale. (2) Includes real estate contracts totaling $1.2 million at December 31, 2001. Activity in the Allowance for Loan Losses - ----------------------------------------- Activity in the allowance for loan losses in the three months ended December 31, 2001 and 2000 is as follows: 2001 2000 ------ ------ Balance beginning of period $3,050 $2,640 Provision for loan losses 392 150 Loans charged off (93) (22) Recoveries on loans previously charged off 3 -- Net charge offs (90) (22) Balance at end of period $3,352 $2,768 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 December 31, 2001 At September 30, 2001 -------------------- --------------------- (in thousands) (in thousands) Non-interest bearing $ 16,737 $ 16,976 N.O.W. checking 32,358 30,626 Passbook savings 34,507 34,228 Money market accounts 30,259 27,251 Certificates of deposit under $100,000 95,675 88,449 Certificates of deposit $100,000 and over 31,225 44,842 --------- --------- Total Deposits $ 240,761 $ 242,372 ========= ========= Comparison of Operating Results for the Three Months Ended December 31, 2001 and 2000 Net Income: Net income for the quarter ended December 31, 2001 was $1.7 million, or $0.42 per diluted share ($0.43 per basic share) compared to $1.5 million, or $0.35 per diluted share ($0.35 per basic share) for the quarter ended December 31, 2000. Primary factors affecting the improved performance in 2001 were increased net interest income, increased fee income, and increased income related to mortgage loans sold. These increases were partially offset by higher non-interest expenses. Net Interest Income: Net interest income increased 20.3% to $5.0 million for the quarter ended December 31, 2001 from $4.1 million for the quarter ended December 31, 2000, primarily due to decreased funding costs. Total interest income decreased slightly to $7.94 million for the quarter ended December 31, 2001 from $7.96 million for the quarter ended December 31, 2000, as the earnings on increased levels of average earning assets helped offset the impact of lower average yields on all categories of earning assets. The yield on earning assets was 8.63% for the quarter ended December 31, 2001 compared to 8.98% for the quarter ended December 31, 2000. Total interest expense decreased $854,000 to $3.0 million for the quarter ended December 31, 2001 from $3.8 million for the quarter ended December 31, 2000. The average cost of funds for each type of the Bank's deposit accounts and FHLB borrowings for the current quarter were lower than a year ago. The overall cost of funds was 4.06% for the quarter ended December 31, 2001 compared to 5.47% for the quarter ended December 31, 2000. In addition, average borrowings from the FHLB were lower than a year ago, also reducing interest expense. Provision for Loan Losses: The provision for loan losses for the three months ended December 31, 2001 was $392,000 compared to $150,000 for the three months ended December 31, 2000. Management conducts regular analyses of the Bank's loan portfolio, which it uses to review the adequacy of its allowance for loan losses. The analyses present data on loans by type of loan, internal loan classifications, historical loss percentages, and economic factors considered by management in reviewing the allowance for loan losses. Based on its internal analysis at December 31, 2001 and trends in the loan portfolio - management deemed the allowance for loan 15
losses of $3.4 million (1.07% of loans receivable and loans held for sale and 101.1% 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 current quarter were $90,000 compared to $22,000 in the same quarter of 2000. Noninterest Income: Total non-interest income increased to $1.2 million for the quarter ended December 31, 2001 from $608,000 for the quarter ended December 31, 2000, primarily due to a $238,000 increase in service charges on deposits, a $212,000 increase in the gain on sale of loans, and a $117,000 increase in servicing income on loans sold. The increased deposit-related service charge income is primarily a result of the Bank's checking account acquisition program. The change in rate environment from 2000 to 2001 significantly increased the Company's loan origination activity, both from new loans made and from refinancing of existing loans at lower interest rates. With the lower rates, the Bank originated more fixed-rate loans in 2001 than in 2000, resulting in increased loan sales, as the Bank sells most fixed-rate one-to-four family mortgage loans. The increased loan sale gains and servicing income are a result of the Company selling $17.2 million in fixed- rate one-to-four family loans and converting $12.2 million in one-to-four family mortgage loans to mortgage-backed securities during the quarter. Noninterest Expense: Total non-interest expense increased to $3.1 million for the three months ended December 31, 2001 from $2.3 million for the three months ended December 31, 2000. This increase is primarily due to a $430,000 increase in salary and employee benefit expense, a $68,000 increase in premises and equipment expenses, a $64,000 increase in advertising expense, and a $52,000 increase in ATM operating 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), hiring additional commercial loan staff to manage the Bank's business banking activities, and expenses associated with the Management Recognition and Development Plan. Provision for Income Taxes: The provision for income taxes increased to $936,000 for the three months ended December 31, 2001 from $764,000 for the three months ended December 31, 2000 primarily as a result of higher income before income taxes. The Company's effective tax rate was 35.4% in 2001 compared to 33.2% in 2000. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans and mortgage backed securities, and proceeds from the sale of loans, maturing securities and FHLB advances. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At December 31, 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 21.3%. The Bank also maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available 16
advances up to an aggregate amount of $134.0 million, under which $66.0 million was outstanding at December 31, 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 December 31, 2001, the Bank had loan commitments totaling $26.5 million and undisbursed loans in process totaling $35.9 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2001 totaled $104.3 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 December 31, 2001, the Bank was in compliance with all applicable capital requirements. For additional details see "Regulatory Capital". Regulatory Capital - ------------------ The following table compares the Bank's regulatory capital at December 31, 2001 to its minimum regulatory capital requirements at that date (dollars in thousands): Percent of Adjusted Amount Total Assets (1) ------- ---------------- Tier 1 (leverage) capital $61,020 16.0% Tier 1 (leverage) capital requirement 15,236 4.0 ------- ---- Excess $45,784 12.0% ======= ==== Tier 1 risk adjusted capital $61,020 22.7% Tier 1 risk adjusted capital requirement 10,756 4.0 ------- ---- Excess $50,264 18.7% ======= ==== Total risk based capital $64,372 23.9% Total risk based capital requirement 21,511 8.0 ------- ---- Excess $42,861 15.9% ======= ==== - --------------- (1) For the Tier 1 (leverage) capital, percent of total average assets of $380.9 million. For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $268.9 million. 17
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES KEY FINANCIAL RATIOS (Dollars in thousands, except per share data) Three Months Ended December 31, September 30, December 31, 2001 2001 2000 ----------------------------------------- PERFORMANCE RATIOS: Return on average assets (1) 1.77% 1.08% 1.67% Return on average equity (1) 9.45% 5.63% 8.48% Net interest margin (1) 5.41% 5.14% 4.67% Efficiency ratio 50.59% 66.33% 48.28% December 31, September 30, December 31, 2001 2001 2000 ----------------------------------------- ASSET QUALITY RATIOS: Non-performing loans $ 3,317 $ 4,091 $ 3,148 REO & other repossessed assets 1,030 1,006 1,948 Total non-performing assets 4,347 5,097 5,096 Non-performing assets to total assets 1.14% 1.32% 1.38% Allowance for loan losses to non-performing loans 101.06% 74.55% 87.93% Book Value Per Share (2) $ 15.98 $ 15.71 $ 15.43 Book Value Per Share (3) $ 17.51 $ 17.20 $ 16.93 - ---------------- (1) Annualized (2) Calculation includes ESOP shares not committed to be released (3) Calculation excludes ESOP shares not committed to be released For The Three Months Ended December 31, September 30, December 31, 2001 2001 2000 ----------------------------------------- AVERAGE BALANCE SHEET: - --------------------- Average Total Loans $ 323,052 $ 327,016 $ 322,679 Average Total Interest Earning Assets 368,219 364,203 354,305 Average Total Assets 385,003 380,496 368,647 Average Total Interest Bearing Deposits 226,005 216,607 193,540 Average FHLB Advances 66,020 72,297 85,699 Average Shareholders' Equity 72,249 72,988 72,707 18
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, 2001. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ---------------------------- Neither the Company nor the Bank is a party to any material legal proceedings at this time. Further, neither the Company nor the Bank is aware of the threat of any such proceedings. From time to time, the Bank is involved in various claims and legal actions arising in the ordinary course of business. Item 2. Changes in Securities and Use of Proceeds - ---------------------------------------------------- Change in Securities -- None to be reported. Use of proceeds -- None to be reported. Item 3. Defaults Upon Senior Securities - ------------------------------------------ None to be reported. Item 4. Submission of Matters to a Vote of Security Holders - -------------------------------------------------------------- An annual meeting of Shareholders of the Company was held on January 24, 2002. The results of the vote on the matters presented at the meeting are as follow: The following individuals were elected as directors: For Against No. No. of Votes Percentage of Votes Percentages --------------------- ---------------------- Richard R. Morris Jr. 3,940,223 98.28% 68,947 1.72% (three-year term) Jon C. Parker 3,952,623 98.59% 56,547 1.41% (three-year term) James C. Mason 3,669,848 91.54% 339,322 8.46% (three-year term) McGladrey & Pullen, LLP was appointed as the Company's independent auditors for the fiscal year ending September 30, 2002. Voting results are as follows: No. of Votes Percentages --------------------------- FOR 3,941,927 98.32% AGAINST 34,845 0.87% ABSTAIN 32,398 0.81% 19
Item 5. Other Information - ----------------------------- None to be reported. Item 6. Exhibits and Reports on Form 8-K - -------------------------------------------- (a) Exhibits 3(a) Articles of Incorporation of the Registrant * 3(b) Bylaws of the Registrant * 10(a) Employee Severance Compensation Plan ** 10(b) Timberland Savings Bank, S.S.B. Employee Stock Ownership Plan ** 10(c) Timberland Bancorp, Inc. 1999 Stock Option Plan *** 10(d) Timberland Bancorp, Inc. Management Recognition and Development Plan *** --------------- * 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 December 31, 2001. 20
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Timberland Bancorp, Inc. Date: February 8, 2002 By: /s/Clarence E. Hamre ------------------------------ Clarence E. Hamre President and Chief Executive Officer (Principal Executive Officer) Date: February 8, 2002 By: /s/Dean J. Brydon ------------------------------ Dean J. Brydon Chief Financial Officer (Principal Financial Officer) 21