UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to _____. Commission file number 0-23333 TIMBERLAND BANCORP, INC. (Exact name of registrant as specified in its charter) Washington 91-1863696 (State of Incorporation) (IRS Employer Identification No.) 624 Simpson Avenue, Hoquiam, Washington (Address of principal executive office) 98550 (Zip Code) (360) 533-4747 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS SHARES OUTSTANDING AT APRIL 30, 2005 ----- ------------------------------------ common stock, $.01 par value 3,759,119
INDEX Page PART I. FINANCIAL INFORMATION ---- Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Shareholders' Equity 5 Condensed Consolidated Statements of Cash Flows 6-7 Condensed Consolidated Statements of Comprehensive Income 8 Notes to Condensed Consolidated Financial Statements 9-13 Item 2. Management's Discussion and Analysis of Financial Condition 13-25 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 26-27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits 27-28 SIGNATURES 29 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------ TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2005 and September 30, 2004 Dollars in Thousands (unaudited) March 31, September 30, 2005 2004 Assets ------------------------ Cash and due from financial institutions $ 16,731 $ 15,268 Interest bearing deposits in banks 1,006 3,385 Federal funds sold 210 1,180 Investment securities held to maturity 147 174 Investment securities available for sale 92,980 59,889 Federal Home Loan Bank stock 5,705 5,682 Loans receivable 381,696 347,975 Loans held for sale -- 610 Less: Allowance for loan losses (4,007) (3,991) ------------------------ Total Loans 377,689 344,594 ------------------------ Accrued interest receivable 2,196 1,828 Premises and equipment 15,878 13,913 Real estate owned and other repossessed items 346 421 Bank owned life insurance ("BOLI") 11,237 11,028 Goodwill 5,645 -- Core deposit intangible 2,022 -- Other assets 3,081 3,057 ------------------------ Total Assets $ 534,873 $ 460,419 ------------------------ Liabilities and Shareholders' Equity Liabilities Deposits $ 399,942 $ 319,570 Federal Home Loan Bank ("FHLB") advances 59,447 65,421 Other borrowings: repurchase agreements 1,472 -- Other liabilities and accrued expenses 2,320 2,611 ------------------------ Total Liabilities 463,181 387,602 ------------------------ Shareholders' Equity Common Stock, $.01 par value; 50,000,000 shares authorized; March 31, 2005-3,759,119 shares issued and outstanding September 30, 2004-3,882,070 shares issued and outstanding 38 39 Additional paid in capital 21,954 24,867 Unearned shares - Employee Stock Ownership Plan (4,098) (4,362) Unearned shares - Management Recognition & Development Plan (215) (537) Retained earnings 54,762 52,967 Accumulated other comprehensive loss (749) (157) ------------------------ Total Shareholders' Equity 71,692 72,817 ------------------------ Total Liabilities and Shareholders' Equity $ 534,873 $ 460,419 ------------------------ See notes to unaudited condensed consolidated financial statements 3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three and six months ended March 31, 2005 and 2004 Dollars in Thousands, Except Per Share Amounts (unaudited) Three Months Ended Six Months Ended March 31, March 31, 2005 2004 2005 2004 ---------------- ---------------- Interest and Dividend Income Loans receivable $ 6,690 $ 6,193 $13,298 $12,476 Securities available for sale and held to maturity 520 239 910 483 Dividends from investments 251 250 517 519 Interest bearing deposits in banks 65 36 205 81 ---------------- ---------------- Total interest and dividend income 7,526 6,718 14,930 13,559 Interest Expense Deposits 1,257 1,082 2,437 2,210 FHLB advances and other borrowings 747 810 1,501 1,661 ---------------- ---------------- Total interest expense 2,004 1,892 3,938 3,871 ---------------- ---------------- Net interest income 5,522 4,826 10,992 9,688 Provision for loan losses 20 30 20 80 ---------------- ---------------- Net interest income after provision 5,502 4,796 10,972 9,608 for loan losses Non-Interest Income Service charges on deposits 642 450 1,339 899 Gain on sale of loans, net 84 256 432 426 Loss on sale of securities -- (6) -- (6) BOLI net earnings 110 112 209 227 Servicing income (expense) on loans sold (47) 14 (109) (4) ATM transaction fees 213 147 410 296 Other 242 144 400 290 ---------------- ---------------- Total non-interest income 1,244 1,117 2,681 2,128 Non-Interest Expense Salaries and employee benefits 2,548 2,234 5,198 4,406 Premises and equipment 566 465 1,077 927 Advertising 212 201 377 352 Real estate owned expense (income) (3) (90) (30) (74) ATM expenses 103 91 216 192 Postage and courier 143 94 301 186 Amortization of core deposit intangible 94 -- 179 -- Other 1,008 848 2,113 1,680 ---------------- ---------------- Total non-interest expense 4,671 3,843 9,431 7,669 Income before federal income taxes 2,075 2,070 4,222 4,067 Federal Income Taxes 624 647 1,277 1,258 ---------------- ---------------- Net Income $ 1,451 $ 1,423 $ 2,945 $ 2,809 ================ ================ Earnings Per Common Share: Basic $0.42 $0.38 $0.84 $0.74 Diluted $0.40 $0.36 $0.80 $0.71 Weighted average shares outstanding: Basic 3,488,385 3,702,491 3,522,062 3,774,929 Diluted 3,644,604 3,901,469 3,681,282 3,975,302 See notes to unaudited condensed consolidated financial statements 4
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the year ended September 30, 2004 and the six months ended March 31, 2005 Dollars in Thousands Except Common Stock Shares (unaudited) <TABLE> 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 ----------- ------ ------- --------- ---------- -------- ------ ------- <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, Sept. 30, 2003 4,251,680 $43 $33,775 ($4,891) ($1,182) $49,699 $ 167 $77,611 Net income -- -- -- -- -- 5,588 -- 5,588 Repurchase of common stock (482,016) (5) (11,074) -- -- -- -- (11,079) Exercise of stock options 112,406 1 1,747 -- - -- -- 1,748 Cash dividends ($.57 per share) -- -- -- -- -- (2,320) -- (2,320) Earned ESOP shares -- 283 529 - -- -- 812 Earned MRDP shares -- 136 -- 645 -- -- 781 Change in fair value of securities available for sale, net of tax -- -- -- -- -- -- (324) (324) ----------------------------------------------------------------------------------- Balance, Sept. 30, 2004 3,882,070 39 24,867 (4,362) (537) 52,967 (157) 72,817 ----------------------------------------------------------------------------------- Net income - -- -- -- -- 2,945 -- 2,945 Repurchase of common stock (146,584) (1) (3,419) - -- -- -- (3,420) Exercise of stock options 23,633 -- 346 -- -- - -- 346 Cash dividends ($.30 per share) -- -- -- - -- (1,150) -- (1,150) Earned ESOP shares -- -- 151 264 -- -- -- 415 Earned MRDP shares -- -- 9 -- 322 -- -- 331 Change in fair value of securities available for sale, net of tax -- -- -- -- -- -- (592) (592) ----------------------------------------------------------------------------------- Balance, March 31, 2005 3,759,119 $38 $21,954 ($4,098) ($215) $54,762 ($749) $71,692 ----------------------------------------------------------------------------------- See notes to unaudited condensed consolidated financial statements 5 </TABLE>
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended March 31, 2005 and 2004 Dollars in Thousands (unaudited) Six Months Ended March 31, Cash Flow from Operating Activities 2005 2004 ------------------ Net income $2,945 $2,809 Noncash revenues, expenses, gains and losses included in income: Depreciation 465 386 Amortization of core deposit intangible 181 -- Federal Home Loan Bank stock dividends (23) (124) Earned ESOP Shares 415 345 Earned MRDP Shares 331 415 Loss on sale of securities available for sale - 6 Gain on sale of real estate owned, net (40) (115) Loss on sale of premises and equipment 13 -- BOLI cash surrender value increase (209) (227) Gain on sale of loans (432) (426) Provision for loan and real estate owned losses 45 91 Loans originated for sale (4,022) (22,574) Proceeds from sale of loans 5,064 23,298 (Increase) decrease in other assets, net (103) 172 Increase (decrease) in other liabilities and accrued expenses, net (338) 29 ------------------ Net Cash Provided by Operating Activities 4,292 4,085 Cash Flow from Investing Activities Decrease in interest-bearing deposits in banks, net 2,379 20,200 Increase in federal funds sold 970 -- Purchase of securities available for sale (38,973) (9,000) Proceeds from maturities of securities available for sale 4,982 7,303 Proceeds from maturities of securities held to maturity 27 -- Increase in loans receivable, net (33,966) (12,783) Additions to premises and equipment (385) (720) Purchase of Venture branches, net of cash and cash equivalents 76,630 -- Proceeds from the disposition of premises and equipment 6 -- Proceeds from sale of real estate owned 350 965 ------------------ Net Cash Provided by Investing Activities 12,020 5,965 Cash Flow from Financing Activities Increase (decrease) in deposits, net (6,123) 9,348 Decrease in Federal Home Loan Bank advances, net (5,974) (6,582) Increase in repurchase agreements 1,472 -- Proceeds from exercise of stock options 346 996 Repurchase of common stock (3,420) (9,489) Payment of dividends (1,150) (1,195) ------------------ Net Cash Used in Financing Activities (14,849) (6,922) See notes to unaudited condensed consolidated financial statements (continued) 6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded) For the six months ended March 31, 2005 and 2004 Dollars in Thousands (unaudited) Six Months Ended March 31, 2005 2004 -------------------- Net Change in Cash 1,463 3,128 Cash and Due from Financial Institutions Beginning of period 15,268 8,587 -------------------- End of period $ 16,731 $ 11,715 -------------------- Supplemental Disclosure of Cash Flow Information Income taxes paid $ 930 $ 775 Interest paid 3,828 3,884 Supplemental Disclosure of Non-cash Investing Activities Market value adjustment of securities held for sale, net of tax (592) 16 Loans transferred to real estate owned 233 76 Supplemental Disclosure of Branch Acquisition Premium paid on deposits (7,848) -- Fair value of assets acquired, principally property and equipment (2,064) -- Deposits assumed 86,495 -- Other liabilities assumed 47 -- Net cash provided by branch acquisition 76,630 -- See notes to unaudited condensed consolidated financial statements 7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and six months ended March 31, 2005 and 2004 Dollars in Thousands (unaudited) Three Months Ended Six Months Ended March 31, March 31, 2005 2004 2005 2004 Comprehensive Income: ------------------ ---------------- Net Income $1,451 $1,423 $2,945 $2,809 Change in fair value of securities available for sale, net of tax (438) 63 (592) 16 ------------------ ---------------- Total Comprehensive Income $1,013 $1,486 $2,353 $2,825 ================= ================ See notes to unaudited condensed consolidated financial statements 8
Timberland Bancorp, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation: The accompanying unaudited condensed consolidated financial statements for Timberland Bancorp, Inc. ("Company") were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments, which are, in the opinion of management, necessary for a fair presentation of the interim condensed consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Timberland Bancorp, Inc. 2004 Annual Report on Form 10-K. The results of operations for the three and six months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year. (b) Principles of Consolidation: The interim condensed consolidated financial statements include the accounts of Timberland Bancorp, Inc. and its wholly-owned subsidiary, Timberland Bank ("Bank"), and the Bank's wholly-owned subsidiary, Timberland Service Corp. All significant intercompany balances have been eliminated in consolidation. (c) The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 9
(2) EARNINGS PER SHARE Basic earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company's common stock during the period. Common stock equivalents arise from assumed conversion of outstanding stock options and awarded but not released Management Recognition and Development Plan ("MRDP") shares. In accordance with Statement of Position ("SOP") 93-6, Employers' Accounting for Employee Stock Ownership Plans (ESOP), issued by the American Institute of Certified Public Accountants, shares owned by the Bank's Employee Stock Ownership Plan that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. At March 31, 2005 and 2004, there were 290,949 and 326,216 ESOP shares, respectively, that had not been allocated. Three Months Ended Six Month Ended March 31, March 31, 2005 2004 2005 2004 Basic EPS computation ------------------ ----------------- Numerator - Net Income $1,451,000 $1,423,000 $2,945,000 $2,809,000 Denominator - Weighted average common shares outstanding 3,488,385 3,702,491 3,522,062 3,774,929 --------- --------- --------- --------- Basic EPS $ 0.42 $ 0.38 $ 0.84 $ 0.74 Diluted EPS computation Numerator - Net Income $1,451,000 $1,423,000 $2,945,000 $2,809,000 Denominator - Weighted average common shares outstanding 3,488,385 3,702,491 3,522,062 3,774,929 Effect of dilutive stock options 133,594 167,605 139,865 171,979 Effect of dilutive MRDP 22,625 31,373 19,355 28,394 Weighted average common shares --------- --------- --------- --------- and common stock equivalents 3,644,604 3,901,469 3,681,282 3,975,302 --------- --------- --------- --------- Diluted EPS $ 0.40 $ 0.36 $ 0.80 $ 0.71 10
(3) STOCK BASED COMPENSATION At March 31, 2005 the Company has an employee, officer, and director stock option plan. The Company accounts for options granted under that plan under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no stock-based compensation cost is reflected in net income as the exercise price for all options granted under the plan was equal to the market value of the Company's stock on the date of grant. The following table illustrates the effect on net income and earnings per share for the three and six months ended March 31, 2005 and 2004 if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation for the effects of all options granted: Three Months Ended Six Month Ended March 31, March 31, 2005 2004 2005 2004 ------------------ ----------------- Net income as reported $1,451,000 $1,423,000 $2,945,000 $2,809,000 Less total stock-based compensation expense determined under fair value method for all qualifying awards, net of tax (143,000) (43,000) (174,000) (80,000) --------- --------- --------- --------- Pro forma net income $1,308,000 $1,380,000 $2,771,000 $2,729,000 --------- --------- --------- --------- Earnings per share: Basic: As reported $ 0.42 $ 0.38 $ 0.84 $ 0.74 Pro forma 0.38 0.37 0.79 0.72 Diluted: As reported $ 0.40 $ 0.36 $ 0.80 $ 0.71 Pro forma 0.36 0.36 0.76 0.69 11
(4) ACQUISITION On October 9, 2004, Timberland Bank, the subsidiary of the Company completed the acquisition of seven branch offices and related deposits from Venture Bank, the subsidiary of the Venture Financial Group. The Bank acquired $86.3 million in deposits. In addition the Bank acquired the real estate, branch infrastructure and employees of the seven branches. The Bank paid $1.8 million for the branch buildings and fixed assets. The Bank paid a premium for the deposits and recorded intangible assets (the excess of the purchase price over the net fair value of the assets and liabilities acquired) in the amount of $7.8 million. As part of the accounting for the acquisition, the intangible assets were recorded as goodwill and core deposit intangible in the amounts of $5.6 million and $2.2 million, respectively. The Company will follow the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides that goodwill is no longer amortized and the value of an identifiable intangible asset is amortized over its useful life, unless the asset is determined to have an indefinite life. The Company will review the recorded value of the goodwill on an annual basis for impairment. The annual test for impairment will be a two-step process. The first step will be to compare the current value of the acquired branch offices and related deposits with the fair value on the purchase date. If the current value exceeds the purchase value, goodwill will not be considered to be impaired and the test is completed. If the purchase date fair value is determined to be greater than the current value, the implied value of the goodwill will be compared to the recorded value of the goodwill. Any noted impairment losses will be recorded at that time. The core deposit intangible recorded as part of the acquisition has an estimated life of ten years and will be amortized using an accelerated method over the ten-year period. (5) SUBSEQUENT EVENTS On April 7, 2005 the Company announced a plan to repurchase up to 5% of the Company's outstanding shares, or 187,955 shares. This is the Company's 13th stock repurchase plan. Share repurchases are scheduled to commence on April 28, 2005, subject to market conditions. On April 26, 2005, the Company announced a quarterly cash dividend of $0.15 per common share. The dividend is to be paid May 24, 2005, to shareholders of record as of the close of business May 10, 2005. On May 2, 2005, the Company announced that on April 26, 2005 its Board of Directors had accelerated the vesting of underwater stock options previously awarded under the Timberland Bancorp, Inc. 1999 Stock Option Plan and the Timberland Bancorp, Inc. 2003 Stock Option Plan in light of the new accounting regulations that will take effect in the Company's next fiscal year. The Board took this action with the belief that it is in the best interests of its shareholders as it will reduce the Company's reported compensation expense in future periods. As a result of the vesting acceleration, options to purchase approximately 27,500 shares of Timberland Bancorp, Inc. common stock became exercisable immediately. All of these stock options were considered underwater or out of the money since the option's exercise price was greater than the current market value. As a result of the acceleration, Timberland Bancorp, Inc. is not expected to be required to recognize anticipated stock option expense net of taxes, of $54,000 in fiscal 2006 through fiscal 2008. The Company will, however, as a result of this action record a footnote stock based compensation expense of approximately $54,000 net of taxes in the quarter ending June 30, 2005. (6) RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement No, 123 (Revised), "Share-Based Payment" (FAS 123(R)). This Statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs 12
liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments, or that may be settled by the issuance of those equity instruments. Statement No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. FAS123(R) replaces existing requirements under FASB Statement No. 123, Accounting for Stock-Based Compensation, and eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. For the Company, the Statement is effective for the interim reporting period beginning October 1, 2005. Adoption of the Standard will impact the consolidated financial statements by requiring compensation expense to be recorded for the unvested portion of stock options, which have been granted or which are subsequently granted. On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", which provides guidance for determining the meaning of "other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company. In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 ("SOP 03-3"), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Management does not expect the adoption of this statement to have a material impact on the Company's consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation --------------------------------------------------------------- The following analysis discusses the material changes in the financial condition and results of operations of the Company at and for the three and six months ended March 31, 2005. This report contains certain "forward-looking statements." The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with forward looking statements. These forward looking statements 13
may describe future plans or strategies and include the Company's expectations of future financial results. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include competition in the financial services market for both deposits and loans, interest rate trends, the economic climate in the Company's market areas and the country as a whole, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Comparison of Financial Condition at March 31, 2005 and September 30, 2004 Total Assets: Total assets increased $74.45 million to $534.87 million at March 31, 2005 from $460.42 million at September 30, 2004 primarily due to a $33.10 million increase in net loans receivable, a $33.06 million increase in investment securities, a $7.67 million increase in goodwill and core deposit intangible, and a $1.97 million increase in premises and equipment. This growth was primarily funded by the net cash received in connection with the acquisition of seven branch offices and related deposits in October 2004. Cash and Due from Financial Institutions: Cash and due from financial institutions increased to $16.73 million at March 31, 2005 from $15.27 million at September 30, 2004. Interest Bearing Deposits in Banks and Federal Funds Sold: Interest bearing deposits in banks and federal funds sold decreased to $1.22 million at March 31, 2005 from $4.57 million at September 30, 2004 as a portion of these liquid funds were used to fund loan growth and purchase investment securities. Investment Securities: Investment securities increased $33.06 million to $93.13 million at March 31, 2005 from $60.06 million at September 30, 2004. The increase was primarily a result of investing a portion of the net cash received in connection with the acquisition of seven branch offices and related deposits into U.S agency securities and mortgage-backed securities. At March 31, 2005, the Company's securities' portfolio was comprised of mutual funds of $32.40 million, mortgage-backed securities of $27.09 million, and U.S. agency securities of $33.64 million. The mutual funds invest primarily in mortgage-backed products and U.S. agency securities. Loans: Net loans receivable increased by $33.10 million to $377.69 million at March 31, 2005 from $344.59 million at September 30, 2004. The increase in the portfolio was primarily a result of a $16.76 million increase in commercial real estate loans, a $6.00 million increase in one-to-four family mortgage loans, a $5.27 million increase in construction loans (net of undisbursed portion), a $3.66 million increase in consumer loans, a $1.89 million increase in land loans, and a $746,000 increase in commercial business loans. These increases were partially offset by a $610,000 decrease in loans held for sale and a $601,000 decrease in multi-family loans. Loan originations totaled $48.94 million and $110.38 million for the three and six months ended March 31, 2005 compared to $32.40 million and $86.72 million for the same periods a year earlier. The Bank sold loans totaling $4.63 million and $9.45 million ($7.96 million in fixed rate one-to-four family mortgage loans and $1.52 million in credit card loans) during the three and six months ended March 31, 2005, compared to $12.62 million and $22.87 million in fixed rate one-to-four family mortgage loans sold for the same periods a year earlier. For additional information, see "Loan Portfolio Composition" section and "Construction and Land Development Loan Portfolio Composition" section included herein. 14
Real Estate Owned and Other Repossessed Items: Real estate owned ("REO") and other repossessed items decreased to $346,000 at March 31, 2005 from $421,000 at September 30, 2004 as several properties were sold. At March 31, 2005, the REO and other repossessed item amounts were comprised of land parcels totaling $335,000 and vehicles and other personal property totaling $11,000. For additional information, see "Non-performing assets" section included herein. Premises and Equipment: Premises and equipment increased by $1.97 million to $15.88 million at March 31, 2005 from $13.9 million at September 30, 2004. This increase is primarily due to the acquisition of seven branch offices in October 2004. The acquired offices are located in Toledo, Winlock, Elma, Montesano, Hoquiam, Aberdeen and Panorama City (Lacey), Washington. Timberland acquired the real estate for all of these offices with the exception of the facility in Panorama City, which is leased. Subsequent to the acquisition, two of the acquired offices (Montesano and Hoquiam) were consolidated with existing Timberland branch offices. Goodwill and Core Deposit Intangible: Goodwill and core deposit intangible increased to $7.67 million at March 31, 2005 as the Bank paid a premium for $86.30 million in deposits acquired in October 2004. Deposits: Deposits increased by $80.37 million to $399.94 million at March 31, 2005 from $319.57 million at September 30, 2004, primarily due to the acquisition of $86.30 million in deposits from in October 2004. The $80.37 million deposit increase is comprised of a $33.55 million increase in certificate of deposit accounts, an $18.67 million increase in N.O.W. checking accounts, a $14.38 million increase in savings accounts, a $7.05 million increase in money market accounts, and a $6.72 million increase in non-interest bearing accounts. For additional information, see "Deposit Breakdown" section included herein. Federal Home Loan Bank ("FHLB") Advances: FHLB advances decreased to $59.45 million at March 31, 2005 from $65.42 million at September 30, 2004 as the Bank repaid several maturing advances with proceeds received in connection with the acquisition of seven branch offices and related deposits in October 2004. For additional information, see "FHLB Advance Maturity Schedule" included herein. Shareholders' Equity: Total shareholders' equity decreased by $1.13 million to $71.69 million at March 31, 2005 from $72.82 million at September 30, 2004, primarily due to the repurchase of 146,584 shares of the Company's stock for $3.42 million, the payment of $1.15 million in dividends to shareholders, and a $592,000 increase in accumulated other comprehensive loss. Partially offsetting these decreases to shareholders' equity were net income of $2.95 million and a $506,000 increase to additional paid in capital from the exercise of stock options and the vesting of shares associated with Bank's benefit plans. Also increasing shareholders' equity were decreases of $322,000 and $264,000 in the equity components related to unearned shares issued to the Management Recognition and Development Plan and the Employee Stock Ownership Plan, respectively. On March 15, 2005 the Company announced that it had completed its 12th stock repurchase program and repurchased 360,670 shares, at an average price of $23.04 per share. Cumulatively the Company has now repurchased 3,339,271 (50.5%) of the 6,612,500 shares that were issued when the Company went public in January 1998 at an average price of $15.32 per share. On April 7, 2005 the Company announced a plan to repurchase up to 5% of the Company's outstanding shares, or 187,955 shares. This is the Company's 13th stock repurchase plan. Share repurchases are scheduled to commence on April 28, 2005, subject to market conditions. For additional information, see Item 2 of Part II of this Form 10-Q. Non-performing Assets: The Company's non-performing asset ratio to total asset ratio ("NPA") increased to 0.64% at March 31, 2005 from 0.40% at September 30, 2004, as total non-performing assets increased to $3.35 15
million from $1.86 million. The ratio increased primarily due to a $1.62 million increase in non-performing loans. The non-performing loan total of $3.06 million at March 31, 2005 consisted of $2.20 million in commercial real estate loans, $405,000 in one-to-four family loans, $348,000 in commercial business loans, and $109,000 in land loans. Despite historically having a higher percentage of non-performing loans than the Company's relevant peer group, the Company's actual charge-offs have remained low. The Company had a net charge-off of $4,000 during the six months ended March 31, 2005 and during the last five fiscal years its net charge-offs to outstanding loans ratio has averaged less than .10% per year. 16
Non Performing Assets - --------------------- The following table sets forth information with respect to the Company's nonperforming assets at the dates indicated. March 31, September 30, 2005 2004 -------------------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Mortgage loans: One-to-four family $ 405 $ 430 Commercial 2,197 640 Land 109 322 Consumer loans -- 23 Commercial business loans 348 27 -------- -------- Total 3,059 1,442 Accruing loans which are contractually past due 90 days or more: -- -- -------- -------- Total -- -- Total of nonaccrual and 90 days past due loans 3,059 1,442 Real estate owned and other repossessed items 346 421 -------- -------- Total nonperforming assets $3,405 $1,863 ======== ======== Restructured loans - -- Nonaccrual and 90 days or more past due loans as a percentage of loans receivable (1) 0.80% 0.41% Nonaccrual and 90 days or more past due loans as a percentage of total assets 0.57% 0.31% Nonperforming assets as a percentage of total assets 0.64% 0.40% Loans receivable (1) $381,696 $348,585 ======= ======= Total assets $534,873 $460,419 ======= ======= ______________ (1) Includes loans held-for-sale and is before the allowance for loan losses 17
Loan Portfolio Composition - -------------------------- The following table sets forth the composition of the Company's loan portfolio by type of loan as of the dates indicated. At March 31, At September 30, 2005 2004 Amount Percent Amount Percent ----------------- ---------------- (Dollars in thousands) Mortgage Loans: One-to-four family (1) $105,220 24.74% $99,835 25.25% Multi family 16,559 3.89 17,160 4.34 Commercial 125,035 29.40 108,276 27.39 Construction and land development 108,387 25.49 106,241 26.88 Land 21,788 5.12 19,895 5.03 -------- ------- -------- ------- Total mortgage loans 376,989 88.64 351,407 88.89 Consumer Loans: Home equity and second mortgage 27,676 6.51 23,549 5.96 Other 8,800 2.07 9,270 2.34 -------- ------- -------- ------- 36,476 8.58 32,819 8.30 Commercial business loans 11,844 2.78 11,098 2.81 -------- ------- -------- ------- Total loans 425,309 100.00% 395,324 100.00% ======= ======= Less: Undisbursed portion of construction loans in process (40,440) (43,563) Unearned income (3,173) (3,176) Allowance for loan losses (4,007) (3,991) -------- -------- Total loans, net $377,689 $344,594 ======== ======== ________________ (1) Includes loans held-for-sale. Construction and Land Development Loan Portfolio Composition - ------------------------------------------------------------ The following table sets forth the composition of the Company's construction and land development loan portfolio as of the dates indicated. At March 31, At September 30, 2005 2004 Amount Percent Amount Percent ----------------- ---------------- (Dollars in thousands) Custom and owner/builder const. $ 39,353 36.31% $43,801 41.23% Speculative construction 27,586 25.45 22,228 20.92 Commercial real estate 24,817 22.90 25,633 24.13 Multi-family 11,034 10.18 3,352 3.15 Land development 5,597 5.16 11,227 10.57 -------- ------- -------- ------- Total construction loans $108,387 100.00% $106,241 100.00% ======== ======= ======== ======= 18
Activity in the Allowance for Loan Losses - ----------------------------------------- Activity in the allowance for loan losses for the six months ended March 31, 2005 and 2004 is as follows: 2005 2004 ------------------------ (Dollars in thousands) Balance beginning of period $3,991 $3,891 Provision for loan losses 20 80 Loans charged off (13) (59) Recoveries on loans previously charged off 9 15 Net charge offs (4) (44) ------ ------ Balance at end of period $4,007 $3,927 ====== ====== 19
Deposit Breakdown - ----------------- The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated. March 31, 2004 September 30, 2004 -------------- ------------------ (in thousands) (in thousands) Non-interest bearing $43,871 $37,150 N.O.W. checking 95,914 77,242 Savings 62,578 48,200 Money market accounts 48,702 41,652 Certificates of deposit under $100,000 115,166 93,750 Certificates of deposit $100,000 and over 33,711 21,576 -------- -------- Total Deposits $399,942 $319,570 ======== ======== FHLB Advance Maturity Schedule - ------------------------------ The Bank's Federal Home Loan Bank borrowings mature at various dates through January 2011 and bear interest at rates ranging from 2.83% to 6.55%. Principal reduction amounts due for future years ending September 30 are as follows (dollars in thousands): 2005 $ 9,094 2006 10,591 2007 64 2008 15,070 2009 4,628 Thereafter 20,000 ------- Total $59,447 ======= A portion of these advances have a putable feature and may be called by the FHLB earlier than the above schedule indicates. 20
Comparison of Operating Results for the Three and Six Months Ended March 31, 2005 and 2004 Net Income: Net income for the quarter ended March 31, 2005 increased to $1.45 million, or $0.40 per diluted share ($0.42 per basic share) from $1.42 million, or $0.36 per diluted share ($0.38 per basic share) for the quarter ended March 31, 2004. The $.04 increase in earnings per share for the quarter ended March 31, 2005 was primarily a result of a $706,000 ($466,000 net of income tax - $0.13 per diluted share) increase in net interest income after provision for loan losses, a $127,000 ($84,000 net of income tax - $0.02 per diluted share) increase in non-interest income, and a lower number of weighted average shares outstanding which increased diluted earnings per share by approximately $0.03. These items were partially offset by an $828,000 ($546,000 net of income tax - $0.14 per diluted share) increase in non-interest expense. Net income for the six months ended March 31, 2005 increased to $2.95 million, or $0.80 per diluted share ($0.84 per basic share) from $2.81 million, or $0.71 per diluted share ($0.74 per basic share) for the six months ended March 31, 2004. The $.09 increase in diluted earnings per share for the six months ended March 31, 2005 was primarily the result of a $1.36 million ($900,000 net of income tax - $0.23 per diluted share) increase in net interest income after provision for loan losses, a $553,000 ($365,000 net of income tax - $0.09 per diluted share) increase in non-interest income, and a lower number of weighted average shares outstanding which increased diluted earnings per share by approximately $0.06. These items were partially offset by a $1.76 million ($1.16 million net of income tax - $0.29 per diluted share) increase in non-interest expense. Net Interest Income: Net interest income increased $696,000 to $5.52 million for the quarter ended March 31, 2005 from $4.83 million for the quarter ended March 31, 2004, primarily due to increased interest income from a larger interest earning asset base. Total interest income increased $808,000 to $7.53 million for the quarter ended March 31, 2005 from $6.72 million for the quarter ended March 31, 2004 as average total interest earning assets increased by $59.93 million. The increased interest earning asset balances were a result of investing the funds received in connection with the acquisition of deposits. Partially offsetting the increased interest earning balances, was a reduction in the yield on assets. The yield on earning assets was 6.30% for the quarter ended March 31, 2005 compared to 6.43% for the quarter ended March 31, 2004. Total interest expense increased by $112,000 to $2.00 million for the quarter ended March 31, 2005 from $1.89 million for the quarter ended March 31, 2004 as average interest bearing liabilities increased $67.84 million. Partially offsetting the increased interest bearing liability levels was a decrease in the average rate paid for these funding sources to 1.94% for the quarter ended March 31, 2005 from 2.20% for the quarter ended March 31, 2004. The net interest margin remained level at 4.62% for the quarters ended March 31, 2005 and 2004. Net interest income increased $1.30 million to $10.99 million for the six months ended March 31, 2005 from $9.69 million for the six months ended March 31, 2004, primarily due to increased interest income from a larger interest earning asset base. Total interest income increased $1.37 million to $14.93 million for the six months ended March 31, 2005 from $13.56 million for the six months ended March 31, 2004 as average total interest earning assets increased by $55.50 million. The increased interest earning asset balances were a result of investing the funds received in connection with the acquisition of deposits. Partially offsetting the increased interest earning balances, was a reduction in the yield on assets. The yield on earning assets was 6.30% for the six months ended March 31, 2005 compared to 6.48% for the six months ended March 31, 2004. Total interest expense increased by $67,000 to $3.94 million for the six months ended March 31, 2005 from $3.87 million for the six months ended March 31, 2004 as average interest bearing liabilities increased $63.62 million. Partially offsetting the increased interest bearing liability levels was a decrease in the average rate paid for these funding sources to 1.93% for the six months ended March 31, 2005 from 2.25% for the six months ended March 31, 2004. As a result of these changes the net interest margin increased to 4.64% for the six months ended March 31, 2005 from 4.63% for the six months ended March 31, 2004. 21
Provision for Loan Losses: The provision for loan losses for the quarter ended March 31, 2005 decreased $20,000 from the quarter ended March 31, 2004 from $30,000 for the quarter ended March 31, 2004. The provision for the six months ended March 31, 2005 decreased to $20,000 from $80,000 for the six months ended March 31, 2004. The sale of the Bank's credit card portfolio in December 2004 reduced the amount of the provision for the six months ended March 31, 2005 according to the Bank's comprehensive analysis. On a quarterly basis the Bank performs an analysis taking into consideration historic loss experience for various loan segments, collateral securing individual loans on non-accrual status, changes in economic conditions, delinquency rates, and other factors to determine the level of allowance for loan losses needed. Based on its comprehensive analysis, management deemed the allowance for loan losses of $4.01 million at March 31, 2005 (1.05% of loans receivable and 130.99% of non-performing loans) adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date. The allowance for loan losses was $3.93 million (1.16% of loans receivable and 99.2% of non-performing loans) at March 31, 2004. The Company had a net charge-off of $7,000 for the current quarter compared to a net charge-off of $29,000 in the same quarter of 2004. For the six months ended March 31, 2005 and 2004, net charge-offs were $4,000 and $44,000, respectively. For additional information, see the "Activity in the Allowance for Loan Losses" section included herein. Non-interest Income: Total non-interest income increased $127,000 to $1.24 million for the quarter ended March 31, 2005 from $1.12 million for the quarter ended March 31, 2004, primarily due to $192,000 increase in service charges on deposits, a $69,000 distribution from one of the Bank's ATM network associations, and a $66,000 increase in ATM transaction fees. The increased service charges on deposits and the increased ATM transaction fees were primarily a result of the increased transaction account base acquired through the branch acquisition. The ATM network association distribution of $69,000 was cash consideration paid to network association members in connection with the association's recent merger. These increases were partially offset by a $233,000 decrease in income from loan sales (gain on sale of loans and servicing income (expense) on loans sold) as fewer loans were sold. The Bank sold $4.63 million in fixed rate one-to-four family mortgages during the quarter ended March 31, 2005 compared to $12.62 million for the same period a year ago. Total non-interest income increased by $553,000 to $2.68 million for the six months ended March 31, 2005 from $2.13 million for the six months ended March 31, 2004, primarily due to a $440,000 increase in service charges on deposits, a $114,000 increase in ATM transaction fees, and a $69,000 distribution from one of the Bank's ATM network associations as discussed above. These increases were partially offset by a $99,000 net decrease in income from loan sales (gain on sale of loans and servicing income (expense) on loans sold.) Non-interest Expense: Total non-interest expense increased by $828,000 to $4.67 million for the quarter ended March 31, 2005 from $3.84 million for the quarter ended March 31, 2004, as the Bank operated with a larger branch network due to the acquisition of seven branch offices and the associated employees in October 2004. The increase was primarily a result of a $314,000 increase in salaries and employee benefits, a $101,000 increase in premises and equipment expenses, a $94,000 core deposit intangible amortization expense, and a $49,000 increase in postage and courier expense. Also impacting the quarterly comparison was an $87,000 reduction in gains from the sale of real estate owned properties. The Bank had income of $90,000 associated with the disposition of real estate owned properties during the quarter ended March 31, 2004. The increased employee expenses were primarily due to the larger employee base resulting from the branch acquisition, annual salary adjustments, and increased medical insurance costs. Total non-interest expense increased by $1.76 million to $9.43 million for the six months ended March 31, 2005 from $7.67 million for the six months ended March 31, 2004. The increase was primarily a result of a $792,000 increase in salaries and employee benefits, $183,000 in expenses associated with the branch acquisition, a 22
$179,000 core deposit intangible amortization expense, a $150,000 increase in premises and equipment expenses, a $115,000 increase in postage and courier expense, and a $46,000 increase in professional and consulting fees. The Company's efficiency ratio increased to 69.04% and 68.98% for the three and six months ended March 31, 2005 from 64.66% and 64.90% for the three and six months ended March 31, 2004. Directly impacting the current period's higher ratios was the acquisition of seven branches as discussed earlier. The Company also announced that it expects to incur additional expenses associated with Sarbanes-Oxley requirements. The projected additional costs total approximately $75,000 for the balance of the fiscal year in addition to the costs associated with hiring an additional employee to assist with the implementation and testing requirements. Provision for Income Taxes: The provision for income taxes decreased to $624,000 for the quarter ended March 31, 2005 from $647,000 for the quarter ended March 31, 2004. The Company's effective tax rate was 30.1% for the quarter ended March 31, 2005 and 31.3% for the quarter ended March 31, 2004. The lower effective tax rate resulted primarily from a higher percentage of tax-exempt income during the current quarter. The provision for income taxes increased to $1.28 million for the six months ended March 31, 2005 from $1.26 million for the six months ended March 31, 2004, primarily due to increased income before taxes. The Company's effective tax rate was 30.2% for the six months ended March 31, 2005 and 30.9% for the six months ended March 31, 2004. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans and mortgage backed securities, and proceeds from the sale of loans, maturing securities and FHLB advances. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. An analysis of liquidity should also include a review of the changes that appear in the condensed consolidated statement of cash flows for the six months ended March 31, 2005. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income, which is adjusted for non-cash items, and increases or decreases in cash due to certain changes in assets and liabilities. Investing activities consist primarily of proceeds from maturities and sales of securities, purchases of securities, and the net change in loans. Financing activities present the cash flows associated with the Company's deposit accounts, other borrowings and stock related transactions. The Company's total of cash and due from financial institutions, interest bearing deposits in banks, and federal funds sold decreased by $1.88 million to $17.95 million at March 31, 2005 from $19.83 million at September 30, 2004. The Company's liquid assets decreased primarily as a result of using a portion of these funds to fund loan growth and purchase investment securities. The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2005, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 10.7%. The Bank also maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available 23
advances up to an aggregate amount of $154.58 million, under which $59.45 million was outstanding at March 31, 2005. Liquidity management is both a short and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits, federal funds sold, and other short-term investments. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral for repurchase agreements. The Bank's primary investing activity is the origination of one-to-four family mortgage loans, commercial mortgage loans, and construction and land development loans. At March 31, 2005, the Bank had loan commitments totaling $31.29 million and undisbursed loans in process totaling $40.44 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2005 totaled $104.75 million. Historically, the Bank has been able to retain a significant amount of its certificates of deposit as they mature. Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. Under current FDIC regulations, insured state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%. At March 31, 2005, the Bank was in compliance with all applicable capital requirements. For additional details see "Regulatory Capital". Regulatory Capital - ------------------ The following table compares the Bank's regulatory capital at March 31, 2005 to its minimum regulatory capital requirements at that date (dollars in thousands): Percent of Amount Adjusted Total Assets(1) ------ ----------------------- Tier 1 (leverage) capital $57,443 11.0% Tier 1 (leverage) capital requirement 20,823 4.0 ------- ----- Excess $36,620 7.0% ======= ===== Tier 1 risk adjusted capital $57,443 15.0% Tier 1 risk adjusted capital requirement 15,350 4.0 ------- ----- Excess $42,093 11.0% ======= ===== Total risk based capital $61,450 16.0% Total risk based capital requirement 30,700 8.0 ------- ----- Excess $30,750 8.0% ======= ===== ___________________ (1) For the Tier 1 (leverage) capital, percent of total average assets of $520.58 million. For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $383.74 million. 24
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES KEY FINANCIAL RATIOS (Dollars in thousands, except per share data) Three Months Six Months Ended March 31, Ended March 31, 2005 2004 2005 2004 ---------------- ---------------- PERFORMANCE RATIOS: Return on average assets (1) 1.10% 1.25% 1.12% 1.24% Return on average equity (1) 7.95% 7.51% 8.06% 7.31% Net interest margin (1) 4.62% 4.62% 4.64% 4.63% Efficiency ratio 69.04% 64.66% 68.98% 64.90% March 31, September 30, 2005 2004 ----------------------------- ASSET QUALITY RATIOS: Non-performing loans $ 3,059 $ 1,442 REO & other repossessed assets 346 421 -------- --------- Total non-performing assets $ 3,405 $ 1,863 -------- --------- Non-performing assets to total assets 0.64% 0.40% Allowance for loan losses to non-performing loans 130.99% 276.77% Book Value Per Share (2) $ 19.07 $ 18.7 Book Value Per Share (3) 20.57 20.28 Tangible Book Value Per Share (2)(4) 17.03 18.76 Tangible Book Value Per Share (3)(4) 18.37 20.28 ______________________ (1) Annualized (2) Calculation includes ESOP shares not committed to be released (3) Calculation excludes ESOP shares not committed to be released (4) Calculation subtracts goodwill and core deposit intangible from the equity component Three Months Ended Six Months Ended March 31, March 31, 2005 2004 2005 2004 ------------------ ---------------- AVERAGE BALANCE SHEET: - --------------------- Average Total Loans $ 371,509 $ 338,694 $ 365,021 $ 337,642 Average Total Interest Earning Assets 477,946 418,012 473,730 418,232 Average Total Assets 527,453 455,272 525,958 454,268 Average Total Interest Bearing Deposits 357,825 286,792 352,740 285,218 Average FHLB Advances & Other Borrowings 54,597 57,786 55,010 58,917 Average Shareholders' Equity 72,962 75,755 73,049 75,877 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- There were no material changes in information concerning market risk from the information provided in the Company's Form 10-K for the fiscal year ended September 30, 2004. Item 4. Controls and Procedures - -------------------------------- (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Section 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls: In the quarter ended March 31, 2005, the Company did not make any significant changes in, nor take any material corrective actions regarding, its internal controls or other factors that could significantly affect these controls. A number of internal control procedures were, however, modified during the quarter to improve internal controls. The Company also continued to implement suggestions from its internal auditor and independent auditor on ways to strengthen existing controls. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------------------------------- Neither the Company nor the Bank is a party to any material legal proceedings at this time. Further, neither the Company nor the Bank is aware of the threat of any such proceedings. From time to time, the Bank is involved in various claims and legal actions arising in the ordinary course of business. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities - ------------------------------------------------------------------------------ The following table sets forth the shares repurchased by the Company during the quarter: Period Total No. Average Total No. of Maximum No.of Of Shares Price Paid Shares Purchas- Shares that May Purchased per Share ed as Part of Yet Be Purchased Publicly Announc- Under the Plan ed Plan - ----------------------------------------------------------------------------- 01/01/2005 - 94,310 $ 23.26 94,310 52,274(1) 01/31/2005 26
02/01/2005 - 10,500 23.20 10,500 41,774 (1) 02/28/2005 03/01/2005 - 41,774 23.44 41,774 -- (1) 03/31/2005 - ------------------------------------------------------------------------- Total 146,584 $ 23.33 146,584 (1) On March 15, 2005 the Company announced that it had completed its 12th stock repurchase program and repurchased 360,670 shares, at an average price of $23.04 per share. All shares were repurchased through open market broker transactions and no shares were directly repurchased from directors or officers of the Company. Item 3. Defaults Upon Senior Securities - ---------------------------------------- None to be reported. Item 4. Submission of Matters to a Vote of Security Holders - -------------------------------------------------------------- An annual meeting of Shareholders of the Company was held on January 25, 2005. The results of the vote on the matters presented at the meeting are as follows: 1. The following individuals were elected as directors: For Withheld No. of Votes Percentage No. of Votes Percentages ------------------------- ------------------------- Richard R. Morris Jr. 3,431,860 98.31% 59,064 1.69% (three-year term) Jon C. Parker 3,166,17 290.70% 324,752 9.30% (three-year term) James C. Mason 3,436,722 98.45% 54,202 1.55% (three-year term) Item 5. Other Information - ----------------------------- None to be reported. Item 6. Exhibits - ------------------- (a) Exhibits 3.1 Articles of Incorporation of the Registrant (1) 3.2 Bylaws of the Registrant (1) 3.3 Amendment to Bylaws (2) 10.1 Employee Severance Compensation Plan (3) 10.2 Employee Stock Ownership Plan (3) 10.3 1999 Stock Option Plan (4) 10.4 Management Recognition and Development Plan (4) 27
10.5 2003 Stock Option Plan (5) 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act 32 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act _________________ (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (333- 35817). (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2002. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997. (4) Incorporated by reference to the Registrant's 1999 Annual Meeting Proxy Statement dated December 15, 1998. (5) Incorporated by reference to the Registrant's 2004 Annual Meeting Proxy Statement dated December 24, 2003. 28
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Timberland Bancorp, Inc. Date: May 10, 2005 By: /s/ Michael R. Sand ---------------------------- Michael R. Sand Chief Executive Officer (Principal Executive Officer) Date: May 10, 2005 By: /s/ Dean J. Brydon ---------------------------- Dean J. Brydon Chief Financial Officer (Principal Financial Officer) 29
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act I, Michael R. Sand, certify that: 1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 /s/ Michael R. Sand ----------------------- Michael R. Sand Chief Executive Officer 30
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act I, Dean J. Brydon, certify that: 1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2005 /s/ Dean J. Brydon ----------------------- Dean J. Brydon Chief Financial Officer 31
EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes Oxley Act CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF TIMBERLAND BANCORP, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that: * the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and * the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations. /s/ Michael R. Sand /s/ Dean J. Brydon ------------------------- ------------------------ Michael R. Sand Dean J. Brydon Chief Executive Officer Chief Financial Officer Date: May 10, 2005 32