UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 JULY 31, 2005 ----- ----------------------------------- common stock, $.01 par value 3,738,737
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 Selected 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. Unregistered Sales of Equity Securities and Use of Proceeds 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 SIGNATURES 29 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------ TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2005 and September 30, 2004 In Thousands (unaudited) June 30, September 30, 2005 2004 ------------------------ Assets Cash and due from financial institutions $ 17,391 $ 15,268 Interest bearing deposits in banks 7,321 3,385 Federal funds sold 4,090 1,180 Investment securities held to maturity 127 174 Investment securities available for sale 91,792 59,889 Federal Home Loan Bank ("FHLB") stock 5,705 5,682 Loans receivable 388,236 347,975 Loans held for sale 2,673 610 Less: Allowance for loan losses (4,103) (3,991) ------------------------ Total Loans 386,806 344,594 ------------------------ Accrued interest receivable 2,144 1,828 Premises and equipment 15,759 13,913 Real estate owned and other repossessed items 372 421 Bank owned life insurance ("BOLI") 11,348 11,028 Goodwill 5,650 -- Core deposit intangible 1,927 -- Other assets 2,447 3,057 ------------------------ Total Assets $552,879 $460,419 ------------------------ Liabilities and Shareholders' Equity Liabilities Deposits $408,163 $319,570 FHLB advances 67,400 65,421 Other borrowings: repurchase agreements 1,091 -- Other liabilities and accrued expenses 3,236 2,611 ------------------------ Total Liabilities 479,890 387,602 ------------------------ Shareholders' Equity Common Stock, $.01 par value; 50,000,000 shares authorized; June 30, 2005 - 3,738,737 shares issued and outstanding September 30, 2004 - 3,882,070 shares issued and outstanding 38 39 Additional paid in capital 21,479 24,867 Unearned shares - Employee Stock Ownership Plan ("ESOP") (3,966) (4,362) Unearned shares - Management Recognition & Development Plan ("MRDP") (54) (537) Retained earnings 56,030 52,967 Accumulated other comprehensive loss (538) (157) ------------------------ Total Shareholders' Equity 72,989 72,817 ------------------------ Total Liabilities and Shareholders' Equity $552,879 $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 nine months ended June 30, 2005 and 2004 In Thousands, Except Per Share Amounts (unaudited) Three Months Nine Months Ended June 30, Ended June 30, -------------------- ------------------ 2005 2004 2005 2004 Interest and Dividend Income Loans receivable $ 7,170 $ 6,099 $20,271 $18,324 Securities available for sale and held to maturity 550 234 1,459 717 Dividends from investments 270 243 788 762 Interest bearing deposits in banks 47 16 252 97 ------------------- ------------------ Total interest and dividend income 8,037 6,592 22,770 19,900 Interest Expense Deposits 1,382 988 3,819 3,199 FHLB advances and other borrowings 846 723 2,347 2,383 ------------------- ------------------ Total interest expense 2,228 1,711 6,166 5,582 ------------------- ------------------ Net interest income 5,809 4,881 16,604 14,318 Provision for loan losses 96 14 116 94 ------------------- ------------------ Net interest income after 5,713 4,867 16,488 14,224 provision for loan losses Non-Interest Income Service charges on deposits 723 510 2,062 1,409 Gain on sale of loans, net 181 159 613 585 Loss on sale of securities -- -- -- (6) BOLI net earnings 111 111 320 338 Servicing income on loans sold 110 18 199 265 ATM transaction fees 223 166 632 462 Other 200 154 600 445 ------------------- ------------------ Total non-interest income 1,548 1,118 4,426 3,498 Non-Interest Expense Salaries and employee benefits 2,528 2,155 7,726 6,561 Premises and equipment 597 426 1,675 1,353 Advertising 187 207 565 559 Real estate owned expense (income) 19 48 (11) (27) ATM expenses 134 111 350 303 Postage and courier 80 85 381 272 Amortization of core deposit intangible 94 -- 273 -- Other 826 862 2,937 2,542 ------------------- ------------------ Total non-interest expense 4,465 3,894 13,896 11,563 Income before federal income taxes 2,796 2,091 7,018 6,159 Federal income taxes 961 645 2,238 1,904 ------------------- ------------------ Net Income $ 1,835 $ 1,446 $ 4,780 $ 4,255 =================== ================== Earnings Per Common Share: Basic $0.54 $0.41 $1.37 $1.16 Diluted $0.51 $0.39 $1.31 $1.10 Weighted Average Shares Outstanding: Basic 3,415,644 3,492,286 3,486,589 3,681,059 Diluted 3,574,410 3,671,143 3,645,658 3,860,573 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, 2004 and the nine months ended June 30, 2005 In Thousands Except Common Stock Shares (unaudited) Accumulated Other Unearned Unearned Compre- Common Common Additional Shares Shares hensive Stock Shares Stock Paid-In Issued to Issued to Retained Income Outstanding Amount Capital ESOP MRDP 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 - - - - - - - - - - 4,780 - - 4,780 Repurchase of common stock (174,434) (1) (4,063) - - - - - - - - (4,064) Exercise of stock options 31,101 - - 436 - - - - - - - - 436 Cash dividends ($.45 per share) - - - - - - - - - - (1,717) - - (1,717) Earned ESOP shares - - - - 222 396 - - - - - - 618 Earned MRDP shares - - - - 17 - - 483 - - - - 500 Change in fair value of securities available for sale, net of tax - - - - - - - - - - - - (381) (381) -------------------------------------------------------------------------------- Balance, June 30, 2005 3,738,737 $38 $21,479 ($3,966) ($54) $56,030 ($538) $72,989 -------------------------------------------------------------------------------- See notes to unaudited condensed consolidated financial statements </TABLE> 5
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended June 30, 2005 and 2004 In Thousands (unaudited) Nine Months Ended June 30, 2005 2004 Cash Flow from Operating Activities -------------------- Net income $4,780 $4,255 Noncash revenues, expenses, gains and losses included in income: Depreciation 696 562 Amortization of core deposit intangible 273 -- FHLB stock dividends (23) (179) Earned ESOP shares 618 612 Earned MRDP shares 500 517 Loss on sale of securities available for sale -- 6 Gain on sale of real estate owned, net (38) (85) Loss on sale of premises and equipment 13 -- BOLI cash surrender value increase (320) (338) Gain on sale of loans (613) (585) Provision for loan and real estate owned losses 128 107 Loans originated for sale (18,319) (32,892) Proceeds from sale of loans 16,869 33,866 (Increase) decrease in other assets, net 284 (184) Increase (decrease) in other liabilities and accrued expenses, net 578 (413) -------------------- Net Cash Provided by Operating Activities 5,426 5,249 Cash Flow from Investing Activities Net (increase) decrease in interest-bearing deposits in banks (3,936) 27,773 Increase in federal funds sold (2,910) -- Purchase of securities available for sale (38,972) (9,000) Proceeds from maturities of securities available for sale 6,485 7,244 Proceeds from maturities of securities held to maturity 46 -- Proceeds from sale of securities available for sale -- 1,600 Increase in loans receivable, net (40,346) (12,540) Additions to premises and equipment (497) (1,038) Purchase of 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 368 1,084 -------------------- Net Cash Provided by (Used in) Investing Activities (3,126) 15,123 Cash Flow from Financing Activities Increase (decrease) in deposits, net 2,098 (79) Increase (decrease) in Federal Home Loan Bank advances, net 1,979 (5,626) Increase in repurchase agreements 1,091 -- Proceeds from exercise of stock options 436 1,602 Repurchase of common stock (4,064) (10,646) Payment of dividends (1,717) (1,737) -------------------- Net Cash Used in Financing Activities (177) (16,486) See notes to unaudited condensed consolidated financial statements (continued) 6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded) For the nine months ended June 30, 2005 and 2004 In Thousands (unaudited) Nine Months Ended June 30, 2005 2004 --------------------- Net Change in Cash 2,123 3,886 Cash and Due from Financial Institutions Beginning of period 15,268 8,587 --------------------- End of period $ 17,391 $ 12,473 ===================== Supplemental Disclosure of Cash Flow Information Income taxes paid $ 1,450 $ 1,560 Interest paid 5,984 5,644 Supplemental Disclosure of Non-cash Investing Activities Market value adjustment of securities held for sale, net of tax (381) (431) Loans transferred to real estate owned 268 206 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 nine months ended June 30, 2005 and 2004 In Thousands (unaudited) Three Months Nine Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ---------------- ---------------- Comprehensive Income: Net Income $1,835 $1,446 $4,780 $4,255 Change in fair value of securities available for sale, net of tax 211 (447) (381) (431) ---------------- ---------------- Total Comprehensive Income $2,046 $ 999 $4,399 $3,824 ================ ================ See notes to unaudited condensed consolidated financial statements 8
Timberland Bancorp, Inc. and Subsidiaries Selected 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. Annual Report on Form 10-K for the year ended September 30, 2004. The results of operations for the three and nine months ended June 30, 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. (d) Certain prior period amounts have been reclassified between interest income and servicing income on loans sold to conform to the June 30, 2005 presentation. There was no change to net income or shareholder's equity amounts previously reported. 9
(2) EARNINGS PER SHARE ("EPS") 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 restricted shares of common stock under the MRDP. 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 ESOP that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. At June 30, 2005 and 2004, there were 290,949 and 326,216 ESOP shares, respectively, that had not been allocated. Three Months Nine Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ---------------------- ---------------------- Basic EPS computation Numerator - Net income $1,835,000 $1,446,000 $4,780,000 $4,255,000 Denominator - Weighted average common shares outstanding 3,415,644 3,492,286 3,486,589 3,681,059 ---------- ---------- ---------- ---------- Basic EPS $ 0.54 $ 0.41 $ 1.37 $ 1.16 Diluted EPS computation Numerator - Net income $1,835,000 $1,446,000 $4,780,000 $4,255,000 Denominator - Weighted average common shares outstanding 3,415,644 3,492,286 3,486,589 3,681,059 Effect of dilutive stock options 129,094 141,104 136,275 148,126 Effect of dilutive MRDP 29,672 37,753 22,794 31,388 ---------- ---------- ---------- ---------- Weighted average common shares and common stock equivalents 3,574,410 3,671,143 3,645,658 3,860,573 ---------- ---------- ---------- ---------- Diluted EPS $ 0.51 $ 0.39 $ 1.31 $ 1.10 10
(3) STOCK BASED COMPENSATION At June 30, 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 Accounting Principles Bulletin ("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. During the quarter ended June 30, 2005 the Company announced that its Board of Directors had accelerated the vesting of out of the money 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 (SFAS No. 123 (Revised)) that will take effect in the Company's next fiscal year. The Board of Directors took this action with the belief that it is 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 out of the money since the option's exercise price was greater than the current market value. As a result of the vesting acceleration, the Company's footnote stock based expense under SFAS No. 123, Accounting for Stock-Based Compensation increased by approximately $54,000 during the quarter ended June 30, 2005. The following table illustrates the effect on net income and earnings per share for the three and nine months ended June 30, 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 Nine Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ---------------------- ---------------------- Net income as reported $1,835,000 $1,446,000 $4,780,000 $4,255,000 Less total stock-based compensation expense determined under fair value method for all qualifying awards, net of tax (75,000) (46,000) (249,000) (126,000) Pro forma net income $1,760,000 $1,400,000 $4,531,000 $4,129,000 Earnings per share: Basic: As reported $ 0.54 $ 0.41 $ 1.37 $ 1.16 Pro forma 0.52 0.40 1.30 1.12 Diluted: As reported $ 0.51 $ 0.39 $ 1.31 $ 1.10 Pro forma 0.49 0.38 1.25 1.07 11
(4) ACQUISITION On October 9, 2004, Timberland Bank, the subsidiary of the Company completed the acquisition of seven branch offices and related deposits of $86.3 million ("Branch Acquisition"). 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 loss 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 July 19, 2005, the Company announced a quarterly cash dividend of $0.16 per common share. The dividend is to be paid August 24, 2005, to shareholders of record as of the close of business August 9, 2005. (6) RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS 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 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. SFAS 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. SFAS No. 123(R) replaces existing requirements under SFAS 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 Statement 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 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 12
in value as a result of credit concerns or solely as a result of 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 May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected 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 Operations --------------------- The following analysis discusses the material changes in the financial condition and results of operations of the Company at and for the three and nine months ended June 30, 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 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. The Company's actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward looking statements as a result of a wide variety or range of factors including, but not limited to: interest rate fluctuations; economic conditions in the Company's primary market area; deposit flows; demand for residential, commercial real estate, consumer, and other types of loans; real estate values; success of new products and services; and other risks detailed in the Company's reports filed with the SEC, including its 2004 Form 10-K. Accordingly, these factors should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. The Company undertakes no responsibility to update or revise any forward-looking statements. Comparison of Financial Condition at June 30, 2005 and September 30, 2004 Total Assets: Total assets increased $92.46 million to $552.88 million at June 30, 2005 from $460.42 million at September 30, 2004 primarily as a result of a $42.21 million increase in net loans receivable, a $31.86 million increase in investment securities, a $7.58 million increase in goodwill and core deposit intangible, a $6.85 million increase in interest bearing deposits in banks and federal funds sold, and a $1.85 million increase in premises and equipment. This growth was primarily funded by the net cash received in connection with the Branch Acquisition. In October 2004, Timberland Bank purchased seven branch offices which are located in Toledo, Winlock, Elma, Montesano, Hoquiam, Aberdeen, and Lacey in the State of Washington. The purchase of the branches included deposit accounts of approximately $86.30 million. 13
Cash and Due from Financial Institutions: Cash and due from financial institutions increased to $17.39 million at June 30, 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 increased $6.84 million to $11.41 million at June 30, 2005 from $4.57 million at September 30, 2004 as a portion of the funds from increased deposits were placed into these liquid accounts. Investment Securities: Investment securities increased $31.86 million to $91.92 million at June 30, 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 Branch Acquisition into U.S agency securities and mortgage-backed securities. At June 30, 2005, the Company's securities' portfolio was comprised of mutual funds of $32.33 million, mortgage-backed securities of $25.72 million, and U.S. agency securities of $33.87 million. The mutual funds invest primarily in mortgage-backed products and U.S. agency securities. For additional information, see the "Investment Securities" table included herein. Loans: Net loans receivable increased by $42.21 million to $386.81 million at June 30, 2005 from $344.59 million at September 30, 2004. The increase in the portfolio was primarily a result of a $17.67 million increase in commercial real estate loans, a $7.61 million increase in consumer loans, a $7.33 million increase in construction loans (net of undisbursed portion), a $4.94 million increase in one-to-four family mortgage loans, a $2.40 million increase in land loans, a $1.70 million increase in multi-family loans, and a $493,000 increase in commercial business loans. Loan originations totaled $58.25 million and $168.63 million for the three and nine months ended June 30, 2005 compared to $46.91 million and $133.63 million for the same periods a year earlier. The Bank sold loans totaling $8.30 million and $17.78 million ($16.26 million in fixed rate one-to-four family mortgage loans and $1.52 million in credit card loans) during the three and nine months ended June 30, 2005, compared to $10.41 million and $33.28 million in fixed rate one-to-four family mortgage loans sold for the same periods a year earlier. For additional information, see the "Loan Portfolio Composition" table and the "Construction and Land Development Loan Portfolio Composition" table included herein. Real Estate Owned and Other Repossessed Items: Real estate owned ("REO") and other repossessed items decreased to $372,000 at June 30, 2005 from $421,000 at September 30, 2004 as several properties were sold and several were added. At June 30, 2005, the REO and other repossessed item amounts were comprised of land parcels totaling $363,000 and vehicles and other personal property totaling $9,000. For additional information, see the "Non-Performing Assets" table included herein. Premises and Equipment: Premises and equipment increased $1.85 million to $15.76 million at June 30, 2005 from $13.91 million at September 30, 2004. This increase is primarily attributable to the Branch Acquisition. 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 Bank branch offices. Goodwill and Core Deposit Intangible: The amortized value of goodwill and core deposit intangible was $7.58 million at June 30, 2005 compared to none at June 30, 2004. The Bank paid a premium for the $86.30 million of deposits acquired in connection with the Branch Acquisition. 14
Deposits: Deposits increased by $88.59 million to $408.16 million at June 30, 2005 from $319.57 million at September 30, 2004, primarily as a result of the acquisition of $86.30 million in deposits in October 2004. The $88.59 million deposit increase is comprised of a $43.83 million increase in certificate of deposit accounts, a $15.80 million increase in NOW checking accounts, a $13.55 million increase in savings accounts, an $8.89 million increase in non-interest bearing accounts, and a $6.53 million increase in money market accounts. For additional information, see "Deposit Breakdown" section included herein. FHLB Advances: FHLB advances increased to $67.40 million at June 30, 2005 from $65.42 million at September 30, 2004 as the Bank borrowed additional funds for a portion of the loan portfolio growth. For additional information, see "FHLB Advance Maturity Schedule" included herein. Shareholders' Equity: Total shareholders' equity increased by $172,000 to $72.99 million at June 30, 2005 from $72.82 million at September 30, 2004, primarily as a result of net income of $4.78 million and a $675,000 increase to additional paid in capital from the exercise of stock options and the vesting associated with the Bank's benefit plans. Also increasing shareholders' equity were decreases of $483,000 and $396,000 in the equity components related to unearned shares issued to the MRDP and the ESOP, respectively. Partially offsetting these increases to shareholders' equity were the repurchase of 174,434 shares of the Company's stock for $4.06 million, the payment of $1.72 million in dividends to shareholders, and a $381,000 increase in accumulated other comprehensive loss. On April 7, 2005 the Company announced a plan to repurchase up to 5% of the Company's outstanding shares of common stock, or 187,955 shares. This represents the Company's 13th stock repurchase plan. As of June 30, 2005, the Company had repurchased 27,850 of these shares at an average price of $23.16 per share. Cumulatively, the Company has repurchased 3,367,121 (50.9%) of the 6,612,500 shares that were issued when the Company went public in 1998. These 3,367,121 shares have been repurchased at an average price of $15.39 per share. 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 0.61% at June 30, 2005 from 0.40% at September 30, 2004, as total non-performing assets increased $1.49 million to $3.35 million from $1.86 million. The increase in non-performing assets was primarily attributable to a $1.53 million increase in non-performing loans. The non-performing loan total of $2.98 million at June 30, 2005 consisted of $1.99 million in one-to-four family loans, $598,000 in commercial real estate loans, $256,000 in commercial business loans, and $131,000 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 nine months ended June 30, 2005 and during the last five fiscal years its net charge-offs to outstanding loans ratio has averaged less than .10% per year. For additional information, see the "Non-Performing Assets" table and the "Activity in the Allowance for Loan Loss" schedule included herein. 15
Investment Securities - --------------------- The following table sets forth the composition of the Company's investment securities portfolio. At June 30, At September 30, 2005 2004 Amount Percent Amount Percent ------------------ ------------------- (Dollars in thousands) Held-to-maturity: Mortgage-backed securities $ 127 0.14% $ 174 0.29% Available-for-sale (at fair value) Mortgage-backed securities 25,591 27.84 18,329 30.52 Mutual funds 32,327 35.17 32,577 54.23 U.S. agency securities 33,874 36.85 8,983 14.96 ------- ------ ------- ------ Total portfolio $91,919 100.00% $60,063 100.00% ======= ====== ======= ====== 16
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 June 30, At September 30, 2005 2004 Amount Percent Amount Percent -------------------- ------------------- (Dollars in thousands) Mortgage Loans: One-to-four family (1) $104,771 24.23% $ 99,835 25.25% Multi family 18,858 4.36 17,160 4.34 Commercial 125,943 29.12 108,276 27.39 Construction and land development 108,567 25.11 106,241 26.88 Land 22,291 5.16 19,895 5.03 -------- ------ -------- ------ Total mortgage loans 380,430 87.98 351,407 88.89 Consumer Loans: Home equity and second mortgage 30,936 7.15 23,549 5.96 Other 9,494 2.19 9,270 2.34 -------- ------ -------- ------ 40,430 9.34 32,819 8.30 Commercial business loans 11,591 2.68 11,098 2.81 -------- ------ -------- ------ Total loans 432,451 100.00% 395,324 100.00% ====== ====== Less: Undisbursed portion of construction loans in process (38,563) (43,563) Unearned income (2,979) (3,176) Allowance for loan losses (4,103) (3,991) -------- -------- Total loans, net $386,806 $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 June 30, At September 30, 2005 2004 Amount Percent Amount Percent -------------------- ------------------- (Dollars in thousands) Custom and owner/builder const. $ 42,562 39.20% $ 43,801 41.23% Speculative construction 28,527 26.28 22,228 20.92 Commercial real estate 24,556 22.62 25,633 24.13 Multi-family 6,896 6.35 3,352 3.15 Land development 6,026 5.55 11,227 10.57 -------- ------ -------- ------ Total construction loans $108,567 100.00% $106,241 100.00% ======== ====== ======== ====== 17
Non-Performing Assets - --------------------- The following table sets forth information with respect to the Company's non-performing assets at the dates indicated. June 30, September 30, 2005 2004 ----------------------- (In thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One-to-four family $ 1,991 $ 430 Commercial 598 640 Land 131 322 Consumer loans -- 23 Commercial business loans 256 27 -------- -------- Total 2,976 1,442 Accruing loans which are contractually past due 90 days or more: -- -- -------- -------- Total -- -- Total of non-accrual and 90 days past due loans 2,976 1,442 Real estate owned and other repossessed items 372 421 -------- -------- Total non-performing assets $ 3,348 $ 1,863 ======== ======== Restructured loans -- -- Non-accrual and 90 days or more past due loans as a percentage of loans receivable (1) 0.76% 0.41% Non-accrual and 90 days or more past due loans as a percentage of total assets 0.54% 0.31% Non-performing assets as a percentage of total assets 0.61% 0.40% Loans receivable (1) $390,909 $348,585 ======== ======== Total assets $552,879 $460,419 ======== ======== - ------------- (1) Includes loans held-for-sale and is before the allowance for loan losses 18
Activity in the Allowance for Loan Losses - ----------------------------------------- Activity in the allowance for loan losses for the nine months ended June 30, 2005 and 2004 is as follows: 2005 2004 ------ ------ (In thousands) Balance beginning of period $3,991 $3,891 Provision for loan losses 116 94 Loans charged off (14) (75) Recoveries on loans previously charged off 10 18 Net charge offs (4) (57) ------ ------ Balance at end of period $4,103 $3,928 ====== ====== 19
Deposit Composition - ------------------- The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated. June 30, 2005 September 30, 2004 ------------- ------------------ (in thousands) (in thousands) Non-interest bearing $ 46,035 $ 37,150 NOW checking 93,042 77,242 Savings 61,754 48,200 Money market accounts 48,178 41,652 Certificates of deposit under $100,000 116,047 93,750 Certificates of deposit $100,000 and over 43,107 21,576 -------- -------- Total Deposits $408,163 $319,570 ======== ======== FHLB Advance Maturity Schedule - ------------------------------ The Bank's FHLB borrowings mature at various dates through January 2011 and bear interest at rates ranging from 3.35% to 6.55%. Principal reduction amounts due for future years ending September 30 are as follows (in thousands): 2005 $ 5,047 2006 18,591 2007 4,064 2008 15,070 2009 4,628 Thereafter 20,000 ------- Total $67,400 ======= 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 Nine Months Ended June 30, 2005 and 2004 Net Income: Net income for the quarter ended June 30, 2005 increased to $1.84 million, or $0.51 per diluted share ($0.54 per basic share) from $1.45 million, or $0.39 per diluted share ($0.41 per basic share), for the quarter ended June 30, 2004. The $0.12 increase in diluted earnings per share for the quarter ended June 30, 2005 was primarily a result of an $846,000 ($558,000 net of income tax - $0.15 per diluted share) increase in net interest income af er provision for loan losses, and a $430,000 ($284,000 net of income tax - $0.08 per diluted share) increase in non-interest income. These items were partially offset by a $571,000 ($377,000 net of income tax - $0.11 per diluted share) increase in non-interest expense. Net income for the nine months ended June 30, 2005 increased to $4.78 million, or $1.31 per diluted share ($1.37 per basic share) from $4.26 million, or $1.10 per diluted share ($1.16 per basic share), for the nine months ended June 30, 2004. The $0.21 increase in diluted earnings per share for the nine months ended June 30, 2005 was primarily the result of a $2.26 million ($1.49 million net of income tax - $0.38 per diluted share) increase in net interest income after provision for loan losses, a $928,000 ($612,000 net of income tax - - $0.15 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 $0.07. These items were partially offset by a $2.33 million ($1.54 million net of income tax - $0.40 per diluted share) increase in non-interest expense. Net Interest Income: Net interest income increased $928,000 to $5.81 million for the quarter ended June 30, 2005 from $4.88 million for the quarter ended June 30, 2004, primarily as a result of increased interest income from a larger interest earning asset base. Total interest income increased $1.45 million to $8.04 million for the quarter ended June 30, 2005 from $6.59 million for the quarter ended June 30, 2004 as average total interest earning assets increased by $85.13 million. The increased interest earning asset balances were primarily a result of investing the funds received in connection with the Branch Acquisition into loans and investment securities. Also contributing to the increased interest income for the current quarter was an increase in the overall yield on interest earning assets. The yield on earning assets for the quarter ended June 30, 2005 increased to 6.56% from 6.51% for the quarter ended June 30, 2004, primarily as a result of the Bank receiving and recognizing $128,000 in delinquent interest on a large loan that had been on non-accrual status. Partially offsetting the increased interest income was an increase in interest expense as average interest bearing deposits and borrowings increased. Total interest expense increased by $517,000 to $2.23 million for the quarter ended June 30, 2005 from $1.71 million for the quarter ended June 30, 2004 as average interest bearing liabilities increased $86.21 million. The increased interest bearing liabilities were primarily a result of the Branch Acquisition. Also contributing to increased interest expense was an increase in the average rate paid for these funding sources to 2.10% for the quarter ended June 30, 2005 from 2.03% for the quarter ended June 30, 2004. As a result of these changes, the net interest margin decreased to 4.74% for the quarter ended June 30, 2005 from 4.82% for the quarter ended June 30, 2004. The Company did not receive a dividend on FHLB of Seattle stock during the quarter ended June 30, 2005 compared to dividends of $55,000 during the same quarter a year ago. The FHLB of Seattle has been operating under a regulatory directive since May 2005 and it has announced that all future dividends will be suspended until its financial position and performance improves. Net interest income increased $2.28 million to $16.60 million for the nine months ended June 30, 2005 from $14.32 million for the nine months ended June 30, 2004, primarily as a result of increased interest income from a larger interest earning asset base. Total interest income increased $2.87 million to $22.77 million for the nine months ended June 30, 2005 from $19.90 million for the nine months ended June 30, 2004 as average total interest earning assets increased by $65.25 million. The increased interest earning asset balances were a result of investing the funds received in connection with the Branch Acquisition. The increased interest earning 21
balances were partially offset by a reduction in the yield on assets. The yield on earning assets decreased to 6.33% for the nine months ended June 30, 2005 from 6.40% for the nine months ended June 30, 2004. Also partially offsetting the increased interest income was an increase in interest expense as average interest bearing deposits and borrowings increased. Total interest expense increased by $584,000 to $6.17 million for the nine months ended June 30, 2005 from $5.58 million for the nine months ended June 30, 2004 as average interest bearing liabilities increased $71.16 million. As a result of these changes the net interest margin increased to 4.62% for the nine months ended June 30, 2005 from 4.61% for the nine months ended June 30, 2004. Provision for Loan Losses: The provision for loan losses increased to $96,000 for the quarter ended June 30, 2005 from $14,000 for the quarter ended June 30, 2004. The provision for the nine months ended June 30, 2005 increased to $116,000 from $94,000 for the nine months ended June 30, 2004. On a quarterly basis the Bank performs a comprehensive 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. Based on its comprehensive analysis, management deemed the allowance for loan losses of $4.10 million at June 30, 2005 (1.05% of loans receivable and 137.87% 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 186.25% of non-performing loans) at June 30, 2004. The Company did not have any net charge-offs during the current quarter compared to a net charge-off of $14,000 in the same quarter of 2004. For the nine months ended June 30, 2005 and 2004, net charge-offs were $4,000 and $57,000, respectively. For additional information, see the "Activity in the Allowance for Loan Losses" table included herein. Non-interest Income: Total non-interest income increased $430,000 to $1.55 million for the quarter ended June 30, 2005 from $1.12 million for the quarter ended June 30, 2004, primarily as a result of a $213,000 increase in service charges on deposits, a $114,000 increase in income from loan sales (gain on sale of loans and servicing income on loans sold), and a $57,000 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. Total non-interest income increased by $928,000 to $4.43 million for the nine months ended June 30, 2005 from $3.50 million for the nine months ended June 30, 2004, primarily as a result of a $653,000 increase in service charges on deposits, a $170,000 increase in ATM transaction fees, and an $81,000 distribution from one of the Bank's ATM network associations. The ATM network association distribution was cash consideration paid to network association members in connection with the association's merger. Non-interest Expense: Total non-interest expense increased by $571,000 to $4.47 million for the quarter ended June 30, 2005 from $3.89 million for the quarter ended June 30, 2004, as the Bank operated with a larger branch network as a result of the Branch Acquisition and the associated employees. The increase was primarily a result of a $373,000 increase in salaries and employee benefits, a $171,000 increase in premises and equipment expenses, and a $94,000 core deposit intangible amortization expense. The increased employee expenses were primarily attributable to the larger employee base resulting from the Branch Acquisition, annual salary adjustments, and increased medical insurance costs. The Company's efficiency ratio improved to 60.69% for the quarter ended June 30, 2005 from 64.91% for the quarter ended June 30, 2004. The improved ratio was primarily attributable to increased net interest income and increased non-interest income. Effective August 1, 2005 expenses will be reduced by $55,000 per month ($660,000 per year pre-tax) due to the elimination of the expense associated with the MRDP. 22
The Company also announced that it expects to incur additional expenses associated with Sarbanes-Oxley internal control documentation requirements. During the quarter ending September 30, 2005, these expenses are projected to range from $125,000 to $150,000 as testing and independent audit procedures are performed in preparation for the Company's September 30, 2005 fiscal year end. Total non-interest expense increased by $2.33 million to $13.90 million for the nine months ended June 30, 2005 from $11.56 million for the nine months ended June 30, 2004. The increase was primarily a result of a $1.17 million increase in salaries and employee benefits, a $322,000 increase in premises and equipment expenses, a $273,000 core deposit intangible expense, $142,000 in expenses associated with the Branch Acquisition, a $109,000 increase in postage and courier expense, and a $47,000 increase in ATM operating fees. The Company's efficiency ratio increased to 66.08% for the nine months ended June 30, 2005 from 64.90% for the nine months ended June 30, 2004. The increased ratio resulted primarily from the Branch Acquistion. Provision for Income Taxes: The provision for income taxes increased to $961,000 and $2.24 million for the three and nine months ended June 30, 2005 from $645,000 and $1.90 million for the three and nine months ended June 30, 2004. The increased tax provision was primarily attributable to increased income before taxes. The Company's effective tax rate was 31.9% for the nine months ended June 30, 2005 and 30.9% for the nine months ended June 30, 2004. The increase in the effective tax rate was primarily a result of a decrease in the percentage of tax exempt income during the current year and tax adjustments relating to the Company's Branch Acquisition. 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 nine months ended June 30, 2005. This statement 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 increased by $8.97 million to $28.80 million at June 30, 2005 from $19.83 million at September 30, 2004. The Company's liquid assets increased primarily as a result of increased deposits. 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 June 30, 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 13.99%. 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 $139.24 million, under which $67.40 million was outstanding at June 30, 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 June 30, 2005, the Bank had loan commitments totaling $28.27 million and undisbursed loans in process totaling $38.56 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from June 30, 2005 totaled $110.84 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 June 30, 2005, the Bank was in compliance with all applicable capital requirements. Regulatory Capital - ------------------ The following table compares the Bank's regulatory capital at June 30, 2005 to its minimum regulatory capital requirements at that date (dollars in thousands): Percent of Amount Adjusted Total Assets(1) ------ ------------------------ Tier 1 (leverage) capital $58,227 10.9% Tier 1 (leverage) capital requirement 21,349 4.0 ------- ---- Excess $36,878 6.9% ======= ==== Tier 1 risk adjusted capital $58,227 14.8% Tier 1 risk adjusted capital requirement 15,791 4.0 ------- ---- Excess $42,436 10.8% ======= ==== Total risk based capital $62,330 15.8% Total risk based capital requirement 31,583 8.0 ------- ---- Excess $30,747 7.8% ======= ==== - -------------- (1) For the Tier 1 (leverage) capital, percent of total average assets of $533.73 million. For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $ 394.78 million. 24
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES KEY FINANCIAL RATIOS (Dollars in thousands, except per share data) Three Months Nine Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ----------------- ----------------- PERFORMANCE RATIOS: Return on average assets (1) 1.35% 1.31% 1.20% 1.26% Return on average equity (1) 10.19% 8.11% 8.77% 7.51% Net interest margin (1) (2) 4.74% 4.82% 4.62% 4.61% Efficiency ratio 60.69% 64.91% 66.08% 64.90% June 30, September 30, 2005 2004 ------------------------ ASSET QUALITY RATIOS: Non-performing loans $ 2,976 $ 1,442 REO and other repossessed assets 372 421 -------- -------- Total non-performing assets $ 3,348 $ 1,863 -------- -------- Non-performing assets to total assets 0.61% 0.40% Allowance for loan losses to non-performing loans 137.87% 276.77% Book Value Per Share (3) $ 19.52 $ 18.76 Book Value Per Share (4) 21.01 20.28 Tangible Book Value Per Share (3) (5) 17.50 18.76 Tangible Book Value Per Share (4) (5) 18.83 20.28 - ---------- (1) Annualized (2) Certain prior period amounts have been reclassified between interest income and servicing income on loans sold to conform to the June 30, 2005 presentation. (3) Calculation includes ESOP shares not committed to be released (4) Calculation excludes ESOP shares not committed to be released (5) Calculation subtracts goodwill and core deposit intangible from the equity component Three Months Nine Months Ended June 30, Ended June 30, 2005 2004 2005 2004 ----------------- ----------------- AVERAGE BALANCE SHEET: Average total loans $385,592 $338,215 $372,183 $338,497 Average total interest earning assets 490,359 405,227 479,551 414,298 Average total assets 544,149 442,653 532,025 451,039 Average total interest bearing deposits 355,367 281,993 353,622 284,127 Average FHLB advances and other borrowings 68,345 55,512 59,455 57,786 Average shareholders' equity 72,027 71,344 72,708 75,541 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 Rule 13a-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 June 30, 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. The Company does not expect that its disclosure controls and procedures and internal controls over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. 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. Unregistered Sales of Equity Securities and Use of Proceeds - -------------------------------------------------------------------- 26
The following table sets forth the shares repurchased by the Company during the quarter: Period Total No. of Average Total No. of Maximum No. Shares Price Shares Purchased of Shares Purchased Paid as Part of that May Yet per Share Publicly Be Purchased Announced Plan(1) Under the Plan - --------------- ------------ --------- ----------------- -------------- 04/01/2005 - 04/30/2005 -- $ -- -- 187,955 05/01/2005 - 05/31/2005 20,850 23.19 20,850 167,105 06/01/2005 - 06/30/2005 7,000 23.05 7,000 160,105 ------ ------- ------ Total 27,850 $ 23.16 27,850 ====== ======= ====== - ---------- (1) On April 7, 2005 the Company announced a plan to repurchase up to 5% of the Company's outstanding shares of common stock, or 187,955 shares. As of June 30, 2005, the Company had repurchased 27,850 of these shares. 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 - ------------------ (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) 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 27
----------- (1) Incorporated by reference to the Registrant's Registration Statement of 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 Exhibit 99 included in the Registrant's Registration Statement on Form S-8 (333-32386) (5) Incorporated by reference to Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163) 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: August 5, 2005 By: /s/Michael R. Sand ----------------------------------- Michael R. Sand Chief Executive Officer (Principal Executive Officer) Date: August 5, 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: August 5, 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: August 5, 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: August 5, 2005 32