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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to . ----- ----- Commission file number 0-23333 TIMBERLAND BANCORP, INC. (Exact name of registrant as specified in its charter) Washington 91-1863696 (State of Incorporation) (IRS Employer Identification No.) 624 Simpson Avenue, Hoquiam, Washington (Address of principal executive office) 98550 (Zip Code) (360) 533-4747 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- 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 MAY 3, 2002 ----- --------------------------------- common stock, $.01 par value 3,870,184
INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Shareholders' Equity 5 Condensed Consolidated Statements of Cash Flows 6-7 Condensed Consolidated Statements of Comprehensive Income 8 Notes to Condensed Consolidated Financial Statements (unaudited) 9-10 Item 2. Management's Discussion and Analysis of Financial 11-19 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 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 CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2002 and September 30, 2001 Dollars in Thousands (unaudited) March 31, September 30, 2002 2001 ---------------------------------- Assets Cash and due from financial institutions $ 10,376 $ 10,017 Interest bearing deposits in banks 26,844 3,422 Investments and mortgage-backed securities (available for sale) 30,333 29,369 Federal Home Loan Bank stock 4,988 4,830 Loans receivable 309,220 308,796 Loans held for sale 4,773 18,022 Less: Allowance for loan losses (3,450) (3,050) -------------------------------- Total Loans 310,543 323,768 -------------------------------- Accrued interest receivable 1,680 1,880 Premises and equipment 11,197 10,660 Real estate owned 983 1,006 Other assets 1,806 1,353 -------------------------------- Total Assets $ 398,750 $ 386,305 -------------------------------- Liabilities and Shareholders' Equity Liabilities Deposits $ 262,834 $ 242,372 Federal Home Loan Bank ("FHLB") advances 61,832 68,978 Other liabilities and accrued expenses 1,810 3,146 -------------------------------- Total Liabilities 326,476 314,496 -------------------------------- Shareholders' Equity Common Stock, $.01 par value; 50,000,000 shares authorized; March 31, 2002 - 4,430,876 issued, 3,870,184 outstanding September 30, 2001 - 4,570,995 issued, 4,010,303 outstanding (unallocated ESOP shares and unvested MRDP shares are not considered outstanding) 44 46 Additional paid in capital 37,401 39,574 Unearned shares - Employee Stock Ownership Plan (5,683) (5,948) Unearned shares - Management Recognition & Development Plan (2,149) (2,471) Retained earnings 42,675 40,332 Accumulated other comprehensive income (loss) (14) 276 -------------------------------- Total Shareholders' Equity 72,274 71,809 -------------------------------- Total Liabilities and Shareholders' Equity $ 398,750 $ 386,305 -------------------------------- 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, 2002 and 2001 Dollars in Thousands, Except Per Share Amounts (unaudited) Three Months Ended March 31, Six Months Ended March 31, 2002 2001 2002 2001 ------------------ ------------------- Interest and Dividend Income Loans receivable $ 6,898 $ 7,380 $14,246 $14,831 Investments and mortgage-backed securities 404 232 815 508 Dividends from investments 173 177 333 356 Interest bearing deposits in banks 41 56 63 105 --------------------- ---------------------- Total interest and dividend income 7,516 7,845 15,457 15,800 Interest Expense Deposits 1,872 2,359 3,974 4,748 Federal Home Loan Bank advances 821 1,160 1,681 2,587 --------------------- ---------------------- Total interest expense 2,693 3,519 5,655 7,335 --------------------- ---------------------- Net interest income 4,823 4,326 9,802 8,465 Provision for Loan Losses 200 200 592 350 --------------------- ---------------------- Net interest income after provision 4,623 4,126 9,210 8,115 for loan losses Non-Interest Income Service charges on deposits 380 227 783 392 Gain on sale of loans, net 220 83 500 151 Market value adjustment on loans held for sale -- -- -- 175 Gain (loss) on sale of securities (19) 228 (16) 228 Escrow fees 72 45 145 84 Servicing income on loans sold 114 30 251 49 Other 279 185 545 327 --------------------- ---------------------- Total non-interest income 1,046 798 2,208 1,406 Non-interest Expense Salaries and employee benefits 1,724 1,323 3,432 2,600 Premises and equipment 368 262 687 514 Advertising 191 234 432 411 Other 863 884 1,701 1,470 --------------------- ---------------------- Total non-interest expense 3,146 2,703 6,252 4,995 Income before federal income taxes 2,523 2,221 5,166 4,526 Federal Income Taxes 894 734 1,830 1,498 --------------------- ---------------------- Net Income $ 1,629 $ 1,487 $ 3,336 $ 3,028 Earnings Per Common Share: Basic $0.42 $0.35 $0.85 $0.71 Diluted $0.41 $0.35 $0.83 $0.70 Weighted average shares outstanding: Basic 3,881,782 4,227,619 3,934,081 4,286,529 Diluted 4,007,169 4,291,671 4,035,921 4,323,091 See notes to unaudited condensed consolidated financial statements 4
<TABLE> TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the year ended September 30, 2001 and the six months ended March 31, 2002 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 ----------- ------ ------- ----- ---- -------- ------ ----- <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 -- -- -- -- -- 3,336 -- 3,336 Repurchase of Common Stock (156,872) (2) (2,411) -- -- -- -- (2,413) Exercise of Stock Options 16,753 -- 201 -- -- -- -- 201 Cash Dividends ($.22 per share) -- -- -- -- -- (993) -- (993) Earned ESOP Shares -- -- -- 265 -- -- -- 265Earned MRDP Shares -- -- 37 -- 322 -- -- 359 Change in fair value of securities available for sale, net of tax -- -- -- -- -- -- (290) (290) --------------------------------------------------------------------------------------- Balance, Mar. 31, 2002 3,870,184 $44 $37,401 ($5,683) ($2,149) $42,675 ($14) $72,274 --------------------------------------------------------------------------------------- See notes to unaudited condensed consolidated financial statements </TABLE> 5
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended March 31, 2002 and 2001 Dollars in Thousands (unaudited) Six Months Ended March 31, Cash Flow from Operating Activities 2002 2001 -------------------------- Net income $ 3,336 $ 3,028 -------------------------- Noncash revenues, expenses, gains and losses included in income: Depreciation 313 226 Federal Home Loan Bank stock dividends (158) (145) Market value adjustment - loans held for sale -- (175) Earned ESOP Shares 265 225 Earned MRDP Shares 359 -- Loss (Gain) on sale of securities available for sale 16 (228) Gain on sale of real estate owned, net (13) (11) Gain on sale of loans (500) (151) Provision for loan and real estate owned losses 643 650 Loans originated for sale (38,921) (11,124) Proceeds from sale of loans 40,444 15,164 Net increase in other assets (123) (311) Decrease in other liabilities and accrued expenses, net (1,336) (133) -------------------------- Net Cash Provided by Operating Activities 4,325 7,015 Cash Flow from Investing Activities Net decrease (increase) in interest-bearing deposits in banks (23,422) 193 Purchase of securities available for sale -- (4,869) Proceeds from maturities of securities available for sale 2,527 8,476 Proceeds from sale of securities available for sale 8,299 430 Increase in loans receivable, net (616) (5,683) Additions to premises and equipment (850) (1,493) Additions to real estate owned (637) (1,380) Proceeds from sale of real estate owned 622 1,174 -------------------------- Net Used in Investing Activities (14,077) (3,152) Cash Flow from Financing Activities Increase in deposits, net 20,462 12,622 Decrease in Federal Home Loan Bank advances, net (7,146) (11,077) Proceeds from exercise of stock options 201 -- Repurchase of common stock (2,413) (3,474) Payment of dividends (993) (951) -------------------------- Net Cash Provided (Used) by Financing Activities 10,111 (2,880) Net Increase in Cash 359 983 Cash and Due from Financial Institutions Beginning of period 10,017 8,893 ------------------------- End of period $ 10,376 $ 9,876 ------------------------- See notes to unaudited condensed consolidated financial statements(continued) 6
Six Months Ended March 31, 2002 2001 -------------------------- Supplemental Disclosure of Cash Flow Information Income taxes paid $ 1,670 $ 925 Interest paid 5,827 7,221 Supplemental Disclosure of Noncash Investing Activities Market value adjustment of securities held for sale, net of tax (290) 284 Investment securities acquired in loan securitization 12,226 -- See notes to unaudited condensed consolidated financial statements 7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and six months ended March 31, 2002 and 2001 Dollars in Thousands (unaudited) Three Months Ended March 31, Six Months Ended March 31, 2002 2001 2002 2001 --------------------------- ------------------------- Comprehensive Income: Net Income $1,629 $1,487 $3,336 $3,028 Change in fair value of securities Available for sale, net of tax 23 (30) (290) 284 --------------------------- ------------------------- Total Comprehensive Income $1,652 $1,457 $3,046 $3,312 See notes to unaudited condensed consolidated financial statements 8
Timberland Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation: The accompanying unaudited consolidated financial statements for Timberland Bancorp, Inc. ("Company") were prepared in accordance with generally accepted accounting principles 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 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 six months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year. (b) Principles of Consolidation: The interim consolidated financial statements include the accounts of Timberland Bancorp, Inc. and its wholly-owned subsidiary, Timberland Bank ("Bank"), and the Bank's wholly- owned subsidiary, Timberland Service Corp. All significant intercompany balances have been eliminated in consolidation. (c) The preparation of financial statements in conformity with 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 March 31, 2002, there were 396,750 ESOP shares that had not been allocated. Three Months Ended March 31, Six Month Ended March 31, 2002 2001 2002 2001 -------------------------- ------------------------- Basic EPS computation Numerator - Net income $ 1,629,000 $ 1,487,000 $ 3,336,000 $ 3,028,000 Denominator - Weighted average common shares outstanding 3,881,782 4,227,619 3,934,081 4,286,529 Basic EPS $ 0.42 $ 0.35 $ 0.85 $ 0.71 Diluted EPS computation Numerator - Net Income $ 1,629,000 $ 1,487,000 $ 3,336,000 $ 3,028,000 Denominator - Weighted average common shares outstanding 3,881,782 4,227,619 3,934,081 4,286,529 Effect of dilutive stock options 106,390 64,052 91,103 36,562 Effect of dilutive MRDP 18,997 -- 10,737 - ----------- ----------- ----------- ----------- Weighted average common shares and common stock equivalents 4,007,169 4,291,671 4,035,921 4,323,091 Diluted EPS $ 0.41 $ 0.35 $ 0.83 $ 0.70 (3) DIVIDEND On April 15, 2002, the Company announced a quarterly cash dividend of $0.11 per common share. The dividend is to be paid May 17, 2002, to shareholders of record as of the close of business May 3, 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 and six months ended March 31, 2002. This report contains certain "forward- looking statements." The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with forward looking statements. These forward looking statements may describe future plans or strategies and include the Company's expectations of future financial results. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include competition in the financial services market for both deposits and loans, interest rate trends, the economic climate in the Company's market areas and the country as a whole, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Comparison of Financial Condition at March 31, 2002 and September 30, 2001 Total Assets: Total assets increased by $12.4 million to $398.8 million at March 31, 2002 from $386.3 million at September 30, 2001 primarily as a result of a $20.5 million increase in deposits. The change is primarily reflected in a $23.4 million increase in interest bearing deposits and a $13.2 million decrease in loans held for sale. Cash and Due from Financial Institutions: Cash and due from financial institutions increased to $10.4 million at March 31, 2002 from $10.0 million at September 30, 2001. Interest Bearing Deposits in Banks: Interest bearing deposits in banks increased by $23.4 million to $26.8 million at March 31, 2002 from $3.4 million at September 30, 2001, primarily due to proceeds received from increased customer deposits and the sale of fixed rate one-to-four family mortgage loans. Investments and Mortgage-backed Securities: Investments and mortgage-backed securities increased to $30.3 million at March 31, 2002 from $29.4 million at September 30, 2001. 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 $310.5 million at March 31, 2002 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 $39.9 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 $13.2 million. Real Estate Owned ("REO"): Real estate owned decreased $23,000 to $983,000 for March 31, 2002 from $1.01 million at September 30, 2001. Premises and Equipment: Premises and equipment increased by $537,000 to $11.2 million at March 31, 2002 from $10.7 million at September 30, 2001. This increase is primarily due to the purchase of a building in Olympia (Thurston County) for a future branch and the acquisition of a building in Hoquiam (Grays Harbor County) for future office space. 11
Deposits: Deposits increased by 8.4% to $262.8 million at March 31, 2002 from $242.4 million at September 30, 2001, primarily due to an $8.8 million increase in the Bank's money market accounts, a $5.0 million increase in N.O.W checking accounts, a $5.2 million increase in passbook savings accounts and a $2.2 million increase in non-interest bearing accounts. Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased by 10.4% to $61.8 million at March 31, 2002 from $69.0 million at September 30, 2001, as funds from increased deposits and loan sales were used to pay down the level of advances. Shareholders' Equity: Total shareholders' equity increased by $465,000 to $72.3 million at March 31, 2002 from $71.8 million at September 30, 2001. The components of shareholders' equity were affected by net income of $3.3 million, the repurchase of 156,872 shares of the Company's stock for $2.4 million, the payment of $993,000 in dividends to shareholders, and a $290,000 decrease in accumulated other comprehensive income. Also affecting shareholders' equity was a $322,000 decrease in the equity component related to unearned shares issued to the Management Recognition and Development Plan, a $265,000 decrease in the equity component related to the unearned shares issued to the Employee Stock Ownership Plan, and a $201,000 increase to additional paid in capital from the exercise of stock options. During the quarter ended March 31, 2002, the Company completed its ninth stock buyback program. The Company has now repurchased 2,404,904 (36.4%) of the 6,612,500 shares that were issued when the Company went public in January 1998. Non-performing Assets: Total non-performing assets remained constant at $4.1 million for March 31, 2002 as compared to September 30, 2001. The Company's non-performing asset ratio to total asset ratio ("NPA") decreased to 1.27% at March 31, 2002 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 March 31, 2002 and September 30, 2001. At March 31, At September 30, 2002 2001 -------------------------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Mortgage loans: One-to-four family $ 1,792 $ 863 Commercial 889 2,091 Construction and land development 536 491 Land 537 610 Consumer loans 58 26 Commercial Business Loans 253 10 --------- --------- Total 4,065 4,091 Accruing loans which are contractually past due 90 days or more: Mortgage loans: -- -- Total of nonaccrual and 90 days past due loans 4,065 4,091 Real estate owned and other repossessed assets 983 1,006 --------- --------- Total nonperforming assets 5,048 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) 1.29% 1.25% Nonaccrual and 90 days or more past due loans as a percentage of total assets 1.02% 1.06% Nonperforming assets as a percentage of total assets 1.27% 1.32% Loans receivable, (including loans held for sale) (1) $ 313,993 $ 326,818 ========= ========= Total assets $ 398,750 $ 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 March 31, At September 30, 2002 2001 Amount Percent Amount Percent ---------------------- -------------------- (Dollars In thousands) Mortgage Loans: One-to-four family (1)(2) $112,871 32.38% $130,082 35.14% Multi family 27,514 7.89 29,412 7.95 Commercial 78,022 22.39 65,731 17.76 Construction and land development 88,636 25.43 106,244 28.71 Land 15,053 4.32 13,632 3.68 -------- ------ -------- ------ Total mortgage loans 322,096 92.41 345,101 93.24 Consumer Loans: Home equity and second mortgage 10,669 3.06 11,039 2.98 Other 7,439 2.14 6,825 1.85 -------- ------ -------- ------ 18,108 5.20 17,864 4.83 Commercial business loans 8,332 2.39 7,150 1.93 -------- ------ -------- ------ Total loans 348,536 100.00% 370,115 100.00% ====== ====== Less: Undisbursed portion of loans in process (31,329) (39,803) Unearned income (3,214) (3,494) Allowance for loan losses (3,450) (3,050) Market value adjustment of loans held-for-sale -- -- -------- -------- Total loans receivable, net $310,543 $323,768 ======== ======== - ----------------- (1) Includes loans held-for-sale. (2) Includes real estate contracts totaling $1.2 million at March 31, 2002. Activity in the Allowance for Loan Losses - ----------------------------------------- Activity in the allowance for loan losses in the six months ended March 31, 2002 and 2001 is as follows: 2002 2001 ------ ------ Balance beginning of period $3,050 $2,640 Provision for loan losses 592 350 Loans charged off (200) (157) Recoveries on loans previously charged off 8 -- Net charge offs (192) (157) Balance at end of period $3,450 $2,833 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 March 31, 2002 At September 30, 2001 ----------------- --------------------- (in thousands) (in thousands) Non-interest bearing $ 19,196 $ 16,976 N.O.W. checking 35,597 30,626 Passbook savings 39,420 34,228 Money market accounts 36,045 27,251 Certificates of deposit under $100,000 93,684 88,449 Certificates of deposit $100,000 and over 38,892 44,842 --------- --------- Total Deposits $ 262,834 $ 242,372 ========= ========= Comparison of Operating Results for the Three and Six Months Ended March 31, 2002 and 2001 Net Income: Net income for the quarter ended March 31, 2002 was $1.63 million, or $0.41 per diluted share ($0.42 per basic share) compared to $1.49 million, or $0.35 per diluted share ($0.35 per basic share) for the quarter ended March 31, 2001. Primary factors affecting the improved performance in 2002 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 income for the six months ended March 31, 2002 was $3.34 million or $0.83 per diluted share ($0.85 per basic share) compared to net income of $3.03 million or $0.70 per diluted share ($0.71 per basic share) for the six months ended March 31, 2001. Net Interest Income: Net interest income increased 11.5% to $4.8 million for the quarter ended March 31, 2002 from $4.3 million for the quarter ended March 31, 2001, primarily due to decreased funding costs. Total interest expense decreased $826,000 to $2.7 million for the quarter ended March 31, 2002 from $3.5 million for the quarter ended March 31, 2001. 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 decreased to 3.67% for the quarter ended March 31, 2002 from 5.09% for the quarter ended March 31, 2001. Total interest income decreased to $7.52 million for the quarter ended March 31, 2002 from $7.85 million for the quarter ended March 31, 2001, primarily due to a decrease in average yields on all categories of earning assets. The yield on earning assets was 8.12% for the quarter ended March 31, 2002 compared to 8.94% for the quarter ended March 31, 2001. The impact of lower average yields was, however, partially offset by increased levels of average earning assets. As a result of these changes, net interest margin increased to 5.21% the quarter ended March 31, 2002 from 4.93% for the quarter ended March 31, 2001. Net interest income increased 15.8 % to $9.8 million for the six months ended March 31, 2002 from $8.5 million for the six months ended March 31, 2001, primarily due to decreased funding costs. Interest expense decreased by $1.7 million as the Company's overall cost of funds decreased to 3.87% for the six months ended March 31, 2002 from 5.28% for the six months ended March 31, 2001. Total interest income decreased $343,000 to $15.5 million for the six months ended March 31, 2002 from $15.8 million for the six months 15
ended March 31, 2001 primarily due to lower average yields on interest earnings assets. Net interest margin was 5.31% for the six months ended March 31, 2002 compared to a net interest margin of 4.80% for the six months ended March 31, 2001. Total interest expense decreased $826,000 to $2.7 million for the quarter ended March 31, 2002 from $3.5 million for the quarter ended March 31, 2001. For the six months ended March 31, 2002 total interest expense decreased by $1.7 million to $5.7 million as compared to $7.3 million for the six months ended March 31, 2001. The average cost of funds for each type of the Bank's deposit accounts and FHLB borrowings for the current six months were lower than a year ago. 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 March 31, 2002 and 2001 was $200,000 in each period. The provision for loan losses for the six months ended March 31, 2002 was $592,000 compared to $350,000 for the six months ended March 31, 2001. 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 March 31, 2002 and trends in the loan portfolio - management deemed the allowance for loan losses of $3.5 million at March 31, 2002 (1.10% of loans receivable and loans held for sale and 84.9% of non- performing loans) adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. The allowance for loan losses was $3.1 million (.93% of loans receivable and loans held for sale) at September 30, 2001 and $2.8 million (.89% of loans receivable and loans held for sale) at March 31, 2001. Net charge-offs for the current quarter were $102,000 compared to $135,000 in the same quarter of 2001. For the six months ended March 31, 2002 and 2001, net charge-offs were $192,000 and $157,000, respectively. Noninterest Income: Total non-interest income increased to $1.05 million for the quarter ended March 31, 2002 from $798,000 for the quarter ended March 31, 2001, primarily due to a $153,000 increase in service charges on deposits, a $137,000 increase in the gain on sale of loans, and an $84,000 increase in servicing income on loans sold. These increases were partially offset by a $247,000 decrease in gain on sale of securities. The increased deposit-related service charge income is primarily a result of the Bank's checking account acquisition program. The change in rate environment during the previous year 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 the quarter ended March 31, 2002 than in the same quarter a year ago. This resulted 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 $23.9 million in fixed-rate one-to-four family loans during the quarter. For the six months ended March 31, 2002 non-interest income increased $802,000 to $2.2 million from $1.4 million for the six months ended March 31, 2001. This increase is primarily due to a $391,000 increase in service charges on deposits, a $349,000 increase in gain on sale of loans, a $202,000 increase in servicing income on loans sold and was partially offset by a $244,000 decrease in gain on sale of securities. Noninterest Expense: Total non-interest expense increased to $3.1 million for the three months ended March 31, 2002 from $2.7 million for the three months ended March 31, 2001. This increase is primarily due to a $401,000 increase in salary and employee benefit expense, a $106,000 increase in premises and equipment expenses, a $62,000 increase in ATM operating expenses, and is partially offset by a $294,000 decrease in REO operation 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 16
manage the Bank's business banking activities, and expenses associated with the Management Recognition and Development Plan. Total non-interest expense increased $1.3 million for the six months ended March 31, 2002 compared to 2001, essentially related to the same factors that affected non-interest expenses for the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001. At March 31, 2002, the number of full-time equivalent employees was 149 compared to 134 at March 31, 2001. Provision for Income Taxes: The provision for income taxes increased to $1.8 million for the six months ended March 31, 2002 from $1.5 million for the six months ended March 31, 2001 primarily as a result of higher income before income taxes. The Company's effective tax rate was 35.4% in 2002 compared to 33.1% in 2001. 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 March 31, 2002, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 26.7%. The Bank also maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of $134.0 million, under which $61.8 million was outstanding at March 31, 2002. Liquidity management is both a short and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term 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 March 31, 2002, the Bank had loan commitments totaling $24.7 million and undisbursed loans in process totaling $31.3 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 March 31, 2002 totaled $107.8 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 17
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, 2002, the Bank was in compliance with all applicable capital requirements. For additional details see "Regulatory Capital". Regulatory Capital - ------------------- The following table compares the Bank's regulatory capital at March 31, 2002 to its minimum regulatory capital requirements at that date (dollars in thousands): Percent of Amount Adjusted Total Assets (1) ------- ------------------------- Tier 1 (leverage) capital $61,506 16.1% Tier 1 (leverage) capital requirement 15,268 4.0 ------- ---- Excess $46,238 12.1% ======= ==== Tier 1 risk adjusted capital $61,506 22.3% Tier 1 risk adjusted capital requirement 11,037 4.0 ------- ---- Excess $50,469 18.3% ======= ==== Total risk based capital $64,956 23.5% Total risk based capital requirement 22,074 8.0 ------- ---- Excess $42,882 15.5% ======= ==== - ------------------- (1) For the Tier 1 (leverage) capital, percent of total average assets of $381.7 million. For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $275.9 million. 18
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES KEY FINANCIAL RATIOS (Dollars in thousands, except per share data) Three Months Ended March 31, Six Months Ended March 31, 2002 2001 2002 2001 --------------------------- ------------------------- PERFORMANCE RATIOS: Return on average assets (1) 1.69% 1.63% 1.73% 1.65% Return on average equity (1) 9.08% 8.20% 9.27% 8.34% Net interest margin (1) 5.21% 4.93% 5.31% 4.80% Efficiency ratio 53.60% 52.75% 52.06% 50.60% March 31, September 30, 2002 2001 ----------------------------------- ASSET QUALITY RATIOS: Non-performing loans $ 4,065 $ 4,091 REO & other repossessed assets 983 1,006 Total non-performing assets 5,048 5,097 Non-performing assets to total assets 1.27% 1.32% Allowance for loan losses to non-performing loans 84.87% 74.55% Book Value Per Share (2) $ 16.31 $ 15.71 Book Value Per Share (3) $ 17.84 $ 17.20 - ---------------------- (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 March 31, Six Months Ended March 31, 2002 2001 2002 2001 ------------------------ ------------------------ AVERAGE BALANCE SHEET: - --------------------- Average Total Loans $ 319,621 $ 319,763 $ 321,337 $ 321,221 Average Total Interest Earning Assets 370,156 350,913 369,188 352,609 Average Total Assets 385,964 365,761 385,484 367,204 Average Total Interest Bearing Deposits 229,566 198,126 227,786 195,833 Average FHLB Advances 63,589 78,334 64,805 82,017 Average Shareholders' Equity 71,755 72,537 72,002 72,622 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- There were no material changes in information concerning market risk from the information provided in the Company's Form 10-K for the fiscal year ended September 30, 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 - -------------------------------------------------------------- None to be reported. 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 March 31, 2002. 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: May 9, 2002 By: /s/ Clarence E. Hamre ------------------------------------- Clarence E. Hamre President and Chief Executive Officer (Principal Executive Officer) Date: May 9, 2002 By: /s/ Dean J. Brydon ------------------------------------- Dean J. Brydon Chief Financial Officer (Principal Financial Officer) 21