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, 2006 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 98550 (Address of principal executive office) (Zip Code) (360) 533-4747 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer Accelerated Filer X Non-accelerated filer --- --- --- Indicate by check mark whether the registrant is a shell company (in Rule 12b-2 of the Exchange Act). Yes No X --- --- 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, 2006 ----- ------------------------------------ Common stock, $.01 par value 3,775,437
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 9-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-27 Item 3. Quantitative and Qualitative Disclosures about Market Risk 28 Item 4. Controls and Procedures 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28-29 Item 3. Defaults Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 29 Item 6. Exhibits 30 SIGNATURES 31 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------------------------------ TIMBERLAND BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2006 and September 30, 2005 In Thousands, Except Share Amounts March 31, September 30, 2006 2005 -------------------------- Assets (Unaudited) Cash and due from financial institutions Non-interest bearing $ 18,650 $ 20,015 Interest bearing deposits in banks 1,872 3,068 Federal funds sold 10,770 5,635 --------- --------- 31,292 28,718 Investments and mortgage-backed securities: Held to maturity 89 104 Available for sale 86,657 89,595 Federal Home Loan Bank ("FHLB") stock 5,705 5,705 --------- --------- 92,451 95,404 Loans receivable 397,216 389,853 Loans held for sale 140 2,355 Less: Allowance for loan losses (4,119) (4,099) --------- --------- Total Loans 393,237 388,109 --------- --------- Accrued interest receivable 2,558 2,294 Premises and equipment 15,933 15,862 Other real estate owned and other repossessed items 110 509 Bank owned life insurance ("BOLI") 11,723 11,502 Goodwill 5,650 5,650 Core deposit intangible 1,670 1,834 Mortgage servicing rights 913 928 Other assets 1,846 1,955 --------- --------- Total Assets $ 557,383 $ 552,765 --------- --------- Liabilities and Shareholders' Equity Liabilities Deposits $ 414,035 $ 411,665 FHLB advances 61,792 62,353 Other borrowings: repurchase agreements 838 781 Other liabilities and accrued expenses 3,005 3,324 --------- --------- Total Liabilities 479,670 478,123 --------- --------- Shareholders' Equity Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued Common Stock, $.01 par value; 50,000,000 shares authorized; March 31, 2006 - 3,774,337 shares issued and outstanding September 30, 2005 - 3,759,937 shares issued and outstanding 38 38 Additional paid in capital 22,391 22,040 Unearned shares - Employee Stock Ownership Plan ("ESOP") (3,569) (3,833) Retained earnings 60,016 57,268 Accumulated other comprehensive loss (1,163) (871) --------- --------- Total Shareholders' Equity 77,713 74,642 --------- --------- Total Liabilities and Shareholders' Equity $ 557,383 $ 552,765 --------- --------- 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, 2006 and 2005 Dollars in Thousands, Except Per Share Amounts (unaudited) Three Months Six Months Ended March 31, Ended March 31, 2006 2005 2006 2005 ------------------ ------------------- Interest and Dividend Income Loans receivable $ 7,624 $ 6,594 $15,108 $13,101 Investments and mortgage-backed securities 576 520 1,113 910 Dividends from investments 342 251 665 517 Federal funds sold 95 50 172 162 Interest bearing deposits in banks 12 15 36 43 ------------------ ------------------- Total interest and dividend income 8,649 7,430 17,094 14,733 Interest Expense Deposits 1,809 1,257 3,497 2,437 FHLB advances 762 737 1,482 1,486 Other borrowings 16 10 26 15 ------------------ ------------------- Total interest expense 2,587 2,004 5,005 3,938 ------------------ ------------------- Net interest income 6,062 5,426 12,089 10,795 Provision for loan losses -- 20 -- 20 ------------------ ------------------- Net interest income after provision for loan losses 6,062 5,406 12,089 10,775 Non-Interest Income Service charges on deposits 737 642 1,457 1,339 Gain on sale of loans, net 88 84 204 432 BOLI net earnings 111 110 221 209 Escrow fees 24 24 55 59 Servicing income on loans sold 78 49 186 88 ATM transaction fees 240 213 476 410 Other 231 218 465 341 ------------------ ------------------- Total non-interest income 1,509 1,340 3,064 2,878 Non-Interest Expense Salaries and employee benefits 2,737 2,548 5,367 5,198 Premises and equipment 631 566 1,239 1,077 Advertising 179 212 315 377 Loss (gain) from real estate operations (39) (3) (91) (30) ATM expenses 97 103 194 216 Postage and courier 132 143 247 301 Amortization of core deposit intangible 82 94 164 179 State and local taxes 128 111 288 206 Professional fees 181 177 389 362 Other 591 720 1,243 1,545 ------------------ ------------------- Total non-interest expense 4,719 4,671 9,355 9,431 Income before federal income taxes 2,852 2,075 5,798 4,222 Federal income taxes 906 624 1,846 1,277 ------------------ ------------------- Net Income $ 1,946 $ 1,451 $ 3,952 $ 2,945 ================== =================== Earnings Per Common Share: Basic $0.55 $0.42 $1.13 $0.84 Diluted $0.53 $0.40 $1.09 $0.80 Weighted average shares outstanding: Basic 3,511,880 3,488,385 3,508,163 3,522,062 Diluted 3,640,612 3,644,604 3,633,034 3,681,282 Dividends per share: $0.16 $0.15 $0.32 $0.30 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, 2005 and the six months ended March 31, 2006 In Thousands, Except Common Stock Shares Unearned Unearned Shares Accumu- Shares Issued to lated Issued to Manage- Other Employee ment Compre- Common Common Additional Stock Recog- hensive Stock Shares Stock Paid-In Ownership nition Retained Income Outstanding Amount Capital Trust Plan Earnings (Loss) Total ----------- ------- -------- --------- ------ -------- ------ --------- <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, Sept. 30, 2004 3,882,070 $39 $24,867 ($4,362) ($537) $52,967 ($157) $72,817 Net income - - - - - - - - - - 6,618 - - 6,618 Repurchase of common stock (174,434) (2) (4,062) - - - - - - - - (4,064) Exercise of stock options 52,301 1 813 - - - - - - - - 814 Cash dividends ($.61 per share) - - - - - - - - - - (2,317) - - (2,317) Earned ESOP shares - - 293 529 - - - - - - 822 Earned MRDP shares (1) - - 129 - - 537 - - - - 666 Change in fair value of securities available for sale, net of tax - - - - - - - - - - - - (714) (714) Balance, Sept. 30, 2005 3,759,937 38 22,040 (3,833) - - 57,268 (871) 74,642 (Unaudited) Net income - - - - - - - - - - 3,952 - - 3,952 Repurchase of common stock (8,200) - - (193) - - - - - - - - (193) Exercise of stock options 22,600 - - 366 - - - - - - - - 366 Cash dividends ($.32 per share) - - - - - - - - - - (1,204) - - (1,204) Earned ESOP shares - - - - 167 264 - - - - - - 431 Stock option compensation expense - - - - 11 - - - - - - - - 11 Change in fair value of securities available for sale, net of tax - - - - - - - - - - - - (292) (292) Balance, March 31, 2006 3,774,337 $38 $22,391 ($3,569) $- - $60,016 ($1,163) $77,713 (1) Shares issued under the Timberland Bancorp, Inc. Management Recognition and Development Plan ("MRDP") 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, 2006 and 2005 In Thousands (unaudited) Six Months Ended March 31, 2006 2005 Cash Flow from Operating Activities --------------------- Net income $3,952 $2,945 Noncash revenues, expenses, gains and losses included in income: Depreciation 518 465 Amortization of core deposit intangible 164 181 FHLB stock dividends - - (23) Earned ESOP Shares 431 415 Earned MRDP Shares - - 331 Stock option compensation expense 11 - - Gain on sale of other real estate owned, net (49) (40) Loss on sale of premises and equipment - - 13 BOLI cash surrender value increase (221) (209) Gain on sale of loans (204) (432) Decrease in deferred loan origination fees (208) (3) Provision for loan and other real estate owned losses - - 45 Loans originated for sale (10,635) (4,022) Proceeds from sale of loans 13,054 5,064 (Increase) decrease in other assets, net 42 (100) Decrease in other liabilities and accrued expenses, net (319) (338) --------------------- Net Cash Provided by Operating Activities 6,536 4,292 Cash Flow from Investing Activities Purchase of securities available for sale - - (38,973) Proceeds from maturities of securities available for sale 2,485 4,982 Proceeds from maturities of securities held to maturity 14 27 Increase in loans receivable, net (7,179) (33,966) Additions to premises and equipment (589) (385) Purchase of branches, net of cash and cash equivalents - - 76,630 Proceeds from the disposition of premises and equipment - - 6 Proceeds from sale of other real estate owned 472 350 --------------------- Net Cash Provided by (Used in) Investing Activities (4,797) 8,671 Cash Flow from Financing Activities Increase (decrease) in deposits, net 2,370 (6,123) Net decrease in FHLB advances - long term (5,561) (4,489) Net increase (decrease) in FHLB advances - short term 5,000 (1,485) Increase in repurchase agreements 57 1,472 Proceeds from exercise of stock options 366 346 Purchase and retirement of common stock (193) (3,420) Payment of dividends (1,204) (1,150) --------------------- Net Cash Provided by (Used in) Financing Activities 835 (14,849) 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, 2006 and 2005 In Thousands (unaudited) Six Months Ended March 31, 2006 2005 --------------------- Net Increase (Decrease) in Cash 2,574 (1,886) Cash and Due from Financial Institutions Beginning of period 28,718 19,833 --------------------- End of period $ 31,292 $ 17,947 --------------------- Supplemental Disclosure of Cash Flow Information Income taxes paid $ 1,495 $ 930 Interest paid 4,877 3,828 Supplemental Disclosure of Non-cash Investing Activities Market value adjustment of securities held for sale, net of tax (292) (592) Loans transferred to other real estate owned 24 233 Supplemental Disclosure of Branch Purchase 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 purchase - - 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, 2006 and 2005 In Thousands (unaudited) Three Months Six Months Ended March 31, Ended March 31, 2006 2005 2006 2005 ------------------ ------------------ Comprehensive Income: Net Income $1,946 $1,451 $3,952 $2,945 Change in fair value of securities available for sale, net of tax (96) (438) (292) (592) ------------------ ------------------ Total Comprehensive Income $1,850 $1,013 $3,660 $2,353 ================== ================== 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 Company's Annual Report on Form 10-K for the year ended September 30, 2005 ("2005 Form 10-K"). The results of operations for the three and six months ended March 31, 2006 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 March 31, 2006 presentation. There was no change to net income or shareholders' equity previously reported. (2) EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted EPS is computed by dividing net income 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 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 ESOP that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. At March 31, 2006 and 2005, there were 255,682 and 290,949 ESOP shares, respectively, that had not been allocated. 9
Three Months Six Months Ended March 31, Ended March 31, 2006 2005 2006 2005 ------------------------ ------------------------ Basic EPS computation Numerator - Net income $ 1,946,000 $ 1,451,000 $ 3,952,000 $ 2,945,000 Denominator - Weighted average common shares outstanding 3,511,880 3,488,385 3,508,163 3,522,062 ----------- ----------- ----------- ----------- Basic EPS $ 0.55 $ 0.42 $ 1.13 $ 0.84 Diluted EPS computation Numerator - Net income $ 1,946,000 $ 1,451,000 $ 3,952,000 $ 2,945,000 Denominator - Weighted average common shares outstanding 3,511,880 3,488,385 3,508,163 3,522,062 Effect of dilutive stock options 128,732 133,594 124,871 139,865 Effect of dilutive MRDP - - 22,625 - - 19,355 ----------- ----------- ----------- ----------- Weighted average common shares and common stock equivalents 3,640,612 3,644,604 3,633,034 3,681,282 ----------- ----------- ----------- ----------- Diluted EPS $ 0.53 $ 0.40 $ 1.09 $ 0.80 (3) STOCK BASED COMPENSATION Prior to October 1, 2005, the Company accounted for stock-based compensation expense using the intrinsic value method as required by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and as permitted by Statement of Financial Accounting Standards ("SFAS" or "Statement") No. 123, "Accounting for Stock-Based Compensation." No compensation cost for stock options was reflected in net income for the fiscal year ended September 30, 2005, as all options granted had an exercise price equal to the market price of the underlying common stock at the date of the grant. On October 1, 2005, the Company adopted SFAS No. 123(R) (revised version of SFAS No. 123) which requires measurement of the compensation cost for all stock-based awards based on the grant-date fair value and recognition of compensation cost over the service period of stock-based awards. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company's valuation methodology previously utilized for options in footnote disclosures required under SFAS No. 123. The Company has adopted SFAS No. 123(R) using the modified prospective method, which provides for no restatement of prior periods and no cumulative adjustment to equity accounts. It also provides for expense recognition, for both new and existing stock-based awards. (4) STOCK COMPENSATION PLANS Stock Option Plans - ------------------ Under the Company's stock option plans (1999 Stock Option Plan and 2003 Stock Option Plan), the Company may grant options for up to a combined total of 811,250 shares of common stock to certain key employees and directors. The exercise price of each option equals the fair market value of the Company's common stock on the date of grant. An option's maximum term is ten years. Options vest in annual installments 10% on each of the ten anniversaries from the date of the grant. If the Company meets three of four established performance criteria the vesting is accelerated to 20% for that year. These four performance criteria are: (i) generating a return on assets which exceeds that of the median of all thrifts in the 12th FHLB District having assets within $250 million of the Company; (ii) generating an efficiency ratio which is less than that of the median of all thrifts in the 12th FHLB District having assets within $250 million of the Company; (iii) generating a net interest 10
margin which exceeds the median of all thrifts in the 12th FHLB District having assets within $250 million of the Company; and (iv) increasing the Company's earnings per share over the prior fiscal year. The Company performs the accelerated vesting analysis in February of each year based on the results of the most recently completed fiscal year. The Company met all four of the performance criteria items for the year ended September 30, 2005. At March 31, 2006, options for 139,208 shares are available for future grant under these plans. Following is activity under the plans: Six Months Ended March 31, 2006 Total Options Outstanding -------------------------- Weighted Weighted Average Average Exercise Fair Shares Price Value ------ ------ ------ Options outstanding, beginning of period 362,411 $13.86 $3.58 Exercised (22,600) 12.16 3.29 Granted -- -- -- Options outstanding, end of period 339,811 $13.98 $3.60 ------- Options exercisable, end of period 308,639 $13.69 $3.55 Six Months Ended March 31, 2005 Total Options Outstanding -------------------------- Weighted Weighted Average Average Exercise Fair Shares Price Value ------ ------ ------ Options outstanding, beginning of period 414,712 $13.86 $3.54 Exercised (23,633) 12.00 3.25 Granted -- -- -- ------- Options outstanding, end of period 391,079 $13.73 $3.56 Options exercisable, end of period 320,400 $12.51 $3.34 The aggregate intrinsic value of all options outstanding at March 31, 2006 was $4.83 million. The aggregate intrinsic value of all options that were exercisable at March 31, 2006 was $4.48 million. The aggregate intrinsic value of all options outstanding at March 31, 2005 was $3.28 million. The aggregate intrinsic value of all options that were exercisable at March 31, 2005 was $3.07 million. Six Months Ended March 31, Total Unvested Options -------------------------- 2006 2005 . ------------------- ------------------- Weighted Weighted Average Average Grant Grant Date Date Fair Fair Shares Value Shares Value ---------------------------------------- Unvested options, beginning of period 38,840 $4.17 77,346 $4.57 Vested (7,668) 4.31 (6,667) 4.71 Granted -- -- -- -- ------ ------ Unvested options, end of period 31,172 $4.13 70,679 $4.56 The total fair value of options vested during the six months ended March 31, 2006 was $33,000. The total fair value of options vested during the six months ended March 31, 2005 was $31,000. 11
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows: Six Months Ended March 31, --------- (In Thousands) 2006 2005 ---- ---- Proceeds from options exercised $274 $239 Related tax benefit recognized 92 84 Intrinsic value of options exercised 272 247 Options outstanding at March 31, 2006 were as follows: Outstanding Exercisable ----------------------------- ------------------------------- Weighted Weighted Weighted Average Weighted Average Range Average Remaining Average Remaining Exercise Exercise Contractual Exercise Contractual Prices Shares Price Life (Years) Shares Price Life (Years) - ------------ ------ ----- ----------- ------ ----- ----------- $12.00-12.38 236,294 $12.01 2.9 235,794 $12.01 2.9 13.59-14.90 33,339 14.70 5.3 23,337 14.70 5.3 15.20-15.96 11,000 15.54 6.0 4,500 15.34 5.8 19.05 28,340 19.05 6.9 14,170 19.05 6.9 22.92-23.25 30,838 23.06 7.8 30,838 23.06 7.8 ------- ------- 339,811 $13.98 4.0 308,639 $13.69 3.8 Options outstanding at March 31, 2005 were as follows: Outstanding Exercisable ----------------------------- ------------------------------- Weighted Weighted Weighted Average Weighted Average Range Average Remaining Average Remaining Exercise Exercise Contractual Exercise Contractual Prices Shares Price Life (Years) Shares Price Life (Years) - ------------ ------ ----- ----------- ------ ----- ----------- $12.00-12.38 286,562 $12.01 3.9 285,062 $12.01 3.9 13.59-14.90 33,339 14.70 6.3 20,003 14.70 6.3 15.20-15.96 12,000 15.54 7.0 3,500 15.35 6.8 19.05 28,340 19.05 7.9 8,502 19.05 7.9 22.92-23.25 30,838 23.06 8.8 3,333 23.06 8.8 ------- ------- 391,079 $13.98 4.8 320,400 $13.69 4.8 The fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. There were no options granted during the six months ended March 31, 2006 and March 31, 2005. 12
Stock Grant Plans - ----------------- The Company adopted the MRDP in 1998, which was subsequently approved by shareholders in 1999 for the benefit of officers, employees and non-employee directors of the Company. The objective of the MRDP is to retain personnel of experience and ability in key positions by providing them with a proprietary interest in the Company. The MRDP allows for the issuance to participants of up to 264,500 shares of the Company's common stock. The Company awarded 204,927 shares under the MRDP to officers and directors in 2001. No shares have been awarded since 2001. Awards under the MRDP were made in the form of restricted shares of common stock that were subject to restrictions on the transfer of ownership. Compensation expense in the amount of the fair value of the common stock at the date of the grant to the plan participants was recognized over a five-year vesting period, with 20% vesting immediately upon grant. At March 31, 2006, participants were fully vested in all shares awarded. There was no activity during the three and six months ended March 31, 2006 related to MRDP shares. Expenses for Stock Compensation Plans - ------------------------------------- Compensation expenses for all stock-based plans were as follows: Six Months Ended March 31, 2006 2005 ---------------------------- (In Thousands) Stock Stock Stock Stock Options Grants Options Grants ------- ------ ------- ------ Compensation expense recognized in income $ 11 $ -- $ -- $ 335 Related tax benefit recognized 4 -- -- 114 The compensation expense yet to be recognized for stock based awards that have been awarded but not vested for the years ending September 30 is as follows (in thousands): Stock Stock Total Options Grants Awards ------- ------ ------ Remainder of 2006 $ 11 $ -- $ 11 2007 16 -- 16 2008 12 -- 12 2009 7 -- 7 2010 4 -- 4 2011 2 -- 2 ---- ---- ---- Total $ 52 $ -- $ 52 (5) DIVIDEND / SUBSEQUENT EVENT On April 27, 2006, the Company announced a quarterly cash dividend of $0.16 per common share, payable May 23, 2006, to shareholders of record as of the close of business May 9, 2006. (6) RECENT ACCOUNTING PRONOUNCEMENTS In March 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 156, Accounting for Servicing of Financial Assets ("SFAS No. 156"). SFAS No. 156 amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require all separately 13
recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS No. 156 also permits servicers to subsequently measure each separate class of servicing assets and liabilities at fair value rather than at the lower of cost or market. For those companies that elect to measure their servicing assets and liabilities at fair value, SFAS No. 156 requires the difference between the carrying value and fair value at the date of adoption to be recognized as a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year in which the election is made. The Company will adopt SFAS No. 156 beginning in the first quarter of 2007. The Company is currently assessing the impact of adopting SFAS No. 156 but does not expect the standard to have a material impact on the Company's consolidated financial statements. In February 2006, FASB issued FASB Staff Position ("FSP") No. 123R-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event." This staff position addresses the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. FSP No. 123R-4 provides that cash settlement features that can be exercised only upon the occurrence of a contingent event that is outside the employee's control does not require classifying the option or similar instrument as a liability until it becomes probable that the event will occur. The Company implemented the guidance of FSP No. 123R-4 in the first quarter of fiscal year 2006. On December 16, 2004, FASB 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." Adoption of the Statement impacts the consolidated financial statements by requiring compensation expense to be recorded for the unvested portion of stock options, which have been granted or are subsequently granted. This Statement became effective for the Company on October 1, 2005. In May 2005, FASB issued SFAS No. 154, "Accounting Changes for Error Corrections (SFAS No. 154)." SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It established, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transaction requirements specific to the newly adopted accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in the fiscal years ending 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 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, 2006. This analysis as well as other sections of 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 14
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 2005 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. Overview Timberland Bancorp, Inc. ("Company"), a Washington corporation, was organized on September 8, 1997 for the purpose of becoming the holding company for Timberland Savings Bank, SSB ("Bank") upon the Bank's conversion from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank ("Conversion"). The Conversion was completed on January 12, 1998 through the sale and issuance of 6,612,500 shares of common stock by the Company. At March 31, 2006, the Company had total assets of $557.38 million and total shareholders' equity of $77.71 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank. The Bank was established in 1915 as "Southwest Washington Savings and Loan Association." In 1935, the Bank converted from a state-chartered mutual savings and loan association to a federally-chartered mutual savings and loan association, and in 1972 changed its name to "Timberland Federal Savings and Loan Association." In 1990, the Bank converted to a federally chartered mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991, the Bank converted to a Washington-chartered mutual savings bank and changed its name to "Timberland Savings Bank, SSB." On December 29, 2000, the Bank changed its name to "Timberland Bank." The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable legal limits under the Savings Association Insurance Fund. The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks and the FDIC. The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its customers while concentrating its lending activities on real estate mortgage loans. The Bank operates 21 branches (including its main office in Hoquiam) in the following market areas: * Grays Harbor County * Thurston County * Pierce County * King County * Kitsap County * Lewis County Critical Accounting Policies and Estimates The Company has identified two accounting policies, that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements. Allowance for loan losses. The allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the portfolio. The allowance is based upon management's comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. 15
These factors include changes in the size and composition of the loan portfolio, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectibility may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The appropriate allowance for loan loss level is estimated based upon factors and trends identified by management at the time consolidated financial statements are prepared. Mortgage Servicing Rights. Mortgage servicing rights ("MSRs") are capitalized when acquired through the origination of loans that are subsequently sold with servicing rights retained and are amortized as an offset to servicing income on loans sold in proportion to and over the period of estimated net servicing income. The value of MSRs at the date of the sale of loans is determined based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and prepayment rates on the underlying loans. The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated cash flows from the servicing assets to those estimated at the time servicing assets were originated. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSR portfolio. The Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect of the fair value. Thus, any measurement of MSRs' fair value is limited by the conditions existing and assumptions as of the date made. Those assumptions may not be appropriate if they are applied at different times. Comparison of Financial Condition at March 31, 2006 and September 30, 2005 The Company's total assets increased $4.61 million to $557.38 million at March 31, 2006 from $552.77 million at September 30, 2005, primarily attributable to a $5.13 million increase in net loans receivable and a $2.57 million increase in cash and due from financial institutions. These increases were partially offset by a $2.95 million decrease in investment securities. Total deposits increased $2.37 million to $414.04 million at March 31, 2006 from $411.67 million at September 30, 2005 primarily attributable to an increase in certificate of deposit accounts. Shareholders' equity increased by $3.07 million to $77.71 million at March 31, 2006 from $74.64 million at September 30, 2005 primarily attributable to retained net income. A more detailed explanation of the changes in significant balance sheet categories follows: Cash and Due from Financial Institutions: Cash and due from financial institutions increased to $31.29 million at March 31, 2006 from $28.72 million at September 30, 2005. The increase was primarily a result of interest bearing deposits in banks and federal funds sold increasing $3.94 million to $12.64 million at March 31, 2006 from $8.70 million at September 30, 2005. The increase was partially offset by a decrease of $1.37 million in non-interest bearing deposits to $18.65 million at March 31, 2006 from $20.02 million at September 31, 2005. Investment Securities and Mortgage-backed Securities: Investment securities decreased by $2.95 million to $92.45 million at March 31, 2006 from $95.40 million at September 30, 2005, due to regular amortization and prepayments on mortgage-backed securities. At March 31, 2006, the Company's securities' portfolio was comprised of U.S. agency securities of $33.60 million, mutual funds of $31.99 million, mortgage-backed securities of $21.16 million, and FHLB stock of $5.70 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. 16
Loans: Net loans receivable increased by $5.13 million to $393.24 million at March 31, 2006 from $388.11 million at September 30, 2005. The increase in the portfolio was primarily a result of a $6.38 million increase in construction loans (net of undisbursed portion), a $3.33 million increase in land loans, a $2.75 million increase in consumer loans, and a $1.89 million increase in multi-family loans. Partially offsetting these increases were decreases of $5.46 million in one-to-four family mortgage loans, $2.58 million in commercial business loans, and $1.37 million in commercial real estate loans. Loan demand remains relatively strong in the Bank's market areas, although an unusually wet winter impacted the loan portfolio by delaying construction loan disbursements on existing construction loans and kept some of the Bank's builders from beginning new projects. Undisbursed construction loan balances increased by $10.10 million to $52.87 million at March 31, 2006. Loan originations totaled $43.98 million and $109.76 million for the three and six months ended March 31, 2006 compared to $48.94 million and $110.38 million for the three and six months ended March 31, 2005. The Bank also continued to sell longer-term fixed rate loans for asset liability management purposes. The Bank sold fixed rate one-to-four family mortgage loans totaling $5.52 million and $13.05 million for the three and six months ended March 31, 2006 compared to $4.63 million and $7.96 million for the three and six months ended March 31, 2005. For additional information, see the sections entitled "Loan Portfolio Composition" and "Construction and Land Development Loan Portfolio Composition" included herein. Other Real Estate Owned and Other Repossessed Items: Other real estate owned ("OREO") and other repossessed items decreased to $110,000 at March 31, 2006 from $509,000 at September 30, 2005 as several properties were sold. At March 31, 2006, OREOs were comprised of three land parcels totaling $110,000. For additional information, see the section entitled "Non-performing Assets" included herein. Premises and Equipment: Premises and equipment increased by $71,000 to $15.93 million at March 31, 2006 from $15.86 million at September 30, 2005, primarily attributable to remodeling costs associated with several branch facilities. Goodwill and Core Deposit Intangible: The value of goodwill and the amortized value of core deposit intangible decreased $164,000 to $7.32 million at March 31, 2006 from $7.48 million at September 30, 2005. The decrease is attributable to scheduled amortization of the core deposit intangible. Deposits: Deposits increased by $2.37 million to $414.04 million at March 31, 2006 from $411.67 million at September 30, 2005. The deposit increase was primarily as a result of a $12.2 million increase in certificate of deposit accounts. This increase was partially offset by decreases of $7.33 million in money market accounts, $1.38 million in savings accounts, and $1.12 million in non-interest bearing accounts. For additional information, see the section entitled "Deposit Breakdown" included herein. FHLB Advances: FHLB advances decreased to $61.79 million at March 31, 2006 from $62.35 million at September 30, 2005 as the Bank repaid several advances. For additional information, see "FHLB Advance Maturity Schedule" included herein. Shareholders' Equity: Total shareholders' equity increased by $3.07 million to $77.71 million at March 31, 2006 from $74.64 million at September 30, 2005, primarily as a result of net income of $3.95 million and a $544,000 increase to additional paid in capital from the exercise of stock options and vesting associated with the Company's benefit plans. Also increasing shareholders' equity was a decrease of $264,000 in the equity component related to unearned shares issued to the ESOP. These increases to shareholders' equity were partially offset by the payment of $1.20 million in dividends to shareholders, the repurchase of 8,200 shares of the Company's common stock for $193,000, and a $292,000 increase in accumulated other comprehensive loss. 17
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 represents the Company's 13th stock repurchase plan. As of March 31, 2006, the Company had repurchased 36,050 of these shares at an average price of $23.26. Cumulatively, the Company has repurchased 3,375,321 shares (51.0%) of the 6,612,500 shares that were issued when the Company went public in January 1998. The 3,375,321 shares have been repurchased at an average price of $15.41 per share. For additional information, see Item 2 of Part II of this Form 10-Q. Non-performing Assets: Non-performing assets to total assets decreased to 0.39% at March 31, 2006 from 0.62% at September 30, 2005, as total non-performing assets decreased to $2.15 million at March 31, 2006 from $3.44 million at March 31, 2005. The ratio decreased primarily as a result of an $886,000 decrease in non-performing assets and a $399,000 decrease in OREO. The non-performing loan total of $2.04 million at March 31, 2006 consisted of a $1.36 million commercial construction loan, $505,000 in one-to-four family loans and $179,000 in commercial real estate loans. Despite having a higher historical 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 recovery of $20,000 during the six months ended March 31, 2006 and during the last five fiscal years its net charge-offs to outstanding loans ratio has averaged less than 0.10% per year. For additional information, see the section entitled "Non-performing Assets" included herein. Investment Securities - --------------------- The following table sets forth the composition of the Company's investment securities portfolio. At March 31, At September 30, 2006 2005 Amount Percent Amount Percent ----------------- ---------------- (In Thousands) Held-to-maturity: Mortgage-backed securities $ 89 0.10% $ 104 0.11% Available-for-sale (at fair value) U.S. agency securities 33,596 36.37 33,695 35.32 Mortgage-backed securities 21,072 22.72 23,735 24.88 Mutual funds 31,989 34.63 32,165 33.71 FHLB stock 5,705 6.18 5,705 5.98 ------- ------ ------- ------ Total portfolio $92,451 100.00% $95,404 100.00% ======= ====== ======= ====== 18
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, 2006 2005 Amount Percent Amount Percent ----------------- ---------------- (In Thousands) Mortgage Loans: One-to-four family (1) $ 96,300 21.26% $101,763 23.24% Multi family 22,058 4.87 20,170 4.61 Commercial 123,480 27.27 124,849 28.51 Construction and land development 128,951 28.47 112,470 25.68 Land 28,314 6.25 24,981 5.71 -------- ------ -------- ------ Total mortgage loans 399,103 88.12 384,233 87.75 Consumer Loans: Home equity and second mortgage 34,704 7.66 32,298 7.38 Other 9,669 2.14 9,330 2.13 -------- ------ -------- ------ 44,373 9.80 41,628 9.51 Commercial business loans 9,436 2.08 12,013 2.74 -------- ------ -------- ------ Total loans 452,912 100.00% 437,874 100.00% ====== ====== Less: Undisbursed portion of construction loans in process (52,869) (42,771) Deferred loan origination fees (2,687) (2,895) Allowance for loan losses (4,119) (4,099) -------- -------- Total loans receivable, net $393,237 $388,109 ======== ======== - -------------- (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, 2006 2005 Amount Percent Amount Percent ----------------- ---------------- (In Thousands) Custom and owner/builder const. $ 43,725 33.91% $ 41,810 37.17% Speculative construction 36,936 28.64 29,635 26.35 Commercial real estate 35,135 27.25 24,064 21.40 Multi-family 2,419 1.88 10,754 9.56 Land development 10,736 8.32 6,207 5.52 -------- ------ -------- ------ Total construction loans $128,951 100.00% $112,470 100.00% ======== ====== ======== ====== 19
Activity in the Allowance for Loan Losses - ----------------------------------------- Activity in the allowance for loan losses for the three and six months ended March 31, 2006 and 2005 is as follows: Three Months Ended March 31, 2006 2005 --------------------- (In Thousands) Balance at beginning of period $4,117 $3,994 Provision for loan losses - - 20 Loans charged off - - (10) Recoveries on loans previously charged off 2 3 --------------------- Net recoveries (charge-offs) 2 (7) ------ ------ Balance at end of period $4,119 $4,007 ====== ====== Six Months Ended March 31, 2006 2005 --------------------- (In Thousands) Balance at beginning of period $4,099 $3,991 Provision for loan losses - - 20 Loans charged off - - (13) Recoveries on loans previously charged off 20 9 --------------------- Net recoveries (charge-offs) 20 (4) ------ ------ Balance at end of period $4,119 $4,007 ====== ====== 20
Non-performing Assets - --------------------- The following table sets forth information with respect to the Company's non-performing assets at the dates indicated. At At March 31, September 30, 2006 2005 -------------------------------- (In Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One-to-four family $ 505 $ 2,208 Commercial 179 261 Construction and land development 1,356 - - Land - - 23 Consumer loans - - 133 Commercial business loans - - 301 -------- -------- Total 2,040 2,926 Accruing loans which are contractually past due 90 days or more: - - - - -------- -------- Total - - - - Total of non-accrual and 90 days past due loans 2,040 2,926 Other real estate owned and other repossessed items 110 509 -------- -------- Total non-performing assets $ 2,150 $ 3,435 ======== ======== Restructured loans - - - - Non-accrual and 90 days or more past due loans as a percentage of loans receivable (1) 0.51% 0.75% Non-accrual and 90 days or more past due loans as a percentage of total assets 0.37% 0.53% Non-performing assets as a percentage of total assets 0.39% 0.62% Loans receivable (1) $397,356 $392,208 ======== ======== Total assets $557,383 $552,765 ======== ======== - -------------- (1) Includes loans held-for-sale and is before the allowance for loan losses. 21
Deposit Breakdown - ----------------- The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated. At At March 31, 2006 September 30, 2005 -------------- ------------------- (In Thousands) Non-interest bearing $ 50,677 $ 51,792 N.O.W. checking 93,470 93,477 Savings 62,890 64,274 Money market accounts 41,961 49,295 Certificates of deposit under $100,000 120,668 117,618 Certificates of deposit $100,000 and over 44,369 35,209 -------- -------- Total Deposits $414,035 411,665 ======== ======== FHLB Advance Maturity Schedule - ------------------------------ The Bank has long- and short-term borrowing lines with the FHLB of Seattle with total credit on the lines equal to 30% of the Bank's total assets, limited by available collateral. Borrowings are considered short-term when the original maturity is less than one year. FHLB advances consisted of the following: At March 31, At September 30, 2006 2005 Amount Percent Amount Percent ----------------- ---------------- (In Thousands) Short-term $ 8,000 12.95% $ -- --% Long-term 53,792 87.05 62,353 100.00 ------- ------ ------- ------ Total FHLB advances $61,792 100.00% $62,353 100.00% ======= ====== ======= ====== The Bank's FHLB borrowings mature at various dates through January 2011 and bear interest at rates ranging from 3.79% to 6.18%. Principal reduction amounts due for future years ending September 30 are as follows (In thousands): 2006 $ 8,030 2007 9,064 2008 15,070 2009 4,628 2010 - - Thereafter 25,000 ------- Total $61,792 ======= A portion of these advances have a putable feature and may be called by the FHLB earlier than the above schedule indicates. 22
Comparison of Operating Results for the Three and Six Months Ended March 31, 2006 and 2005 The Company's net income increased by $495,000, or 34.1% to $1.95 million for the quarter ended March 31, 2006 from $1.45 million for the quarter ended March 31, 2005. Diluted earnings per share increased by 32.5% to $0.53 for the quarter ended March 31, 2006 from $0.40 for the quarter ended March 31, 2005. For the six months ended March 31, 2006 net income increased by $1.01 million or 34.2% to $3.95 million from $2.95 million for the six months ended March 31, 2005. Diluted earnings per share increased by 36.3% to $1.09 for the six months ended March 31, 2006 from $0.80 for the six months ended March 31, 2005. The improved profitability for the first two quarters of the fiscal year are largely a result of the Company's focus on balancing the repricing characteristics of its assets and liabilities. This has allowed the maintenance of a healthy net interest margin in spite of the current flat yield curve environment. The net interest margin increased to 4.84% and 4.85% for the three and six months ended March 31, 2006, respectively, from 4.54% and 4.56% for the three and six months ended March 31, 2005, respectively. A more detailed explanation of the income statement categories is presented below. Net Income: Net income for the quarter ended March 31, 2006 increased $495,000 to $1.95 million, or $0.53 per diluted share ($0.55 per basic share) from $1.45 million, or $0.40 per diluted share ($0.42 per basic share) for the quarter ended March 31, 2005. The $0.13 increase in diluted earnings per share for the quarter ended March 31, 2006 was primarily a result of a $656,000 ($433,000 net of income tax - $0.11 per diluted share) increase in net interest income after provision for loan losses and a $169,000 ($112,000 net of income tax - $0.03 per diluted share) increase in non-interest income. These items were partially offset by a $48,000 ($32,000 net of income tax - $0.01 per diluted share) increase in non-interest expense. Net income for the six months ended March 31, 2006 increased $1.01 million to $3.95 million, or $1.09 per diluted share ($1.13 per basic share) from $2.95 million, or $0.80 per diluted share ($0.84 per basic share) for the six months ended March 31, 2005. The $0.29 increase in diluted earnings per share for the six months ended March 31, 2006 was primarily the result of a $1.31 million ($867,000 net of income tax - $0.24 per diluted share) increase in net interest income after provision for loan losses, a $186,000 ($123,000 net of income tax - $0.03 per diluted share) increase in non-interest income, a $76,000 ($50,000 net of income tax - $0.01 per diluted share) decrease in non-interest expense, and a lower number of weighted average shares outstanding, which increased diluted earnings per share by approximately $0.01 Net Interest Income: Net interest income increased $636,000 to $6.06 million for the quarter ended March 31, 2006 from $5.43 million for the quarter ended March 31, 2005, primarily attributable to a larger interest earning asset base and an increase in the Company's net interest margin. Total interest income increased $1.22 million to $8.65 million for the quarter ended March 31, 2006 from $7.43 million for the quarter ended March 31, 2005 as average total interest earning assets increased by $22.89 million to $500.84 million for the three months ended March 31, 2006. The yield on interest earning assets increased to 6.91% for the quarter ended March 31, 2006 from 6.22% for the quarter ended March 31, 2005. Total interest expense increased by $583,000 to $2.59 million for the quarter ended March 31, 2006 from $2.00 million for the quarter ended March 31, 2005 as average interest bearing liabilities increased $11.65 million to $424.07 million. The average rate paid on interest bearing liabilities increased to 2.47% for the quarter ended March 31, 2006 from 1.94% for the quarter ended March 31, 2005. The increased rate paid on interest bearing liabilities was primarily attributable to increased rates paid on certificate of deposit accounts and money market accounts. The net interest margin increased to 4.84% for the quarter ended March 31, 2006 from 4.54% for the quarter ended March 31, 2005. 23
Net interest income increased $1.29 million to $12.09 million for the six months ended March 31, 2006 from $10.80 million for the six months ended March 31, 2005, primarily attributable to a larger interest earning asset base and an increase in the Company's net interest margin. Total interest income increased $2.36 million to $17.09 million for the six months ended March 31, 2006 from $14.73 million for the six months ended March 31, 2005 as average total interest earning assets increased by $24.30 million to $498.03 million for the six months ended March 31, 2006. The yield on interest earning assets was 6.87% for the six months ended March 31, 2006 compared to 6.22% for the six months ended March 31, 2005. Total interest expense increased by $1.07 million to $5.01 million for the six months ended March 31, 2006 from $3.94 million for the six months ended March 31, 2005 as average interest bearing liabilities increased $13.53 million to $421.28 million. The average rate paid on interest bearing liabilities increased to 2.38% for the six months ended March 31, 2006 from 1.94% for the six months ended March 31, 2005. The increase rate paid on interest bearing liabilities was primarily attributable to increased rates paid on certificate of deposit accounts and money market accounts. The net interest margin increased to 4.85% for the six months ended March 31, 2006 from 4.56% for the six months ended March 31, 2005. Provision for Loan Losses: There was no provision for loan losses established for the six months ended March 31, 2006 as credit quality remained strong. The allowance for loan losses, however, did increase during this period as a result of a net recovery of $20,000. The Bank has established a comprehensive methodology for determining the provision for loan losses. On a quarterly basis the Bank performs an analysis taking into consideration pertinent factors underlying the quality of the loan portfolio. The factors include changes in the size and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of loans on non-accrual status, 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 $4.12 million at March 31, 2006 (1.04% of loans receivable and 201.91% 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 $4.01 million (1.05% of loans receivable and 130.99% of non-performing loans) at March 31, 2005. The Company had net recoveries of $2,000 and $20,000 for the three and six months ended March 31, 2006 compared to net charge-offs of $7,000 and $4,000 for the three and six months ended March 31, 2005. For additional information, see the section entitled "Activity in the Allowance for Loan Losses" included herein. Non-interest Income: Total non-interest income increased $169,000 to $1.51 million for the quarter ended March 31, 2006 from $1.34 million for the quarter ended March 31, 2005, primarily as a result of a $95,000 increase in service charges on deposits, a $29,000 increase in servicing income on loans sold, and a $27,000 increase in ATM transaction fees. The Bank also continued to generate non-interest income from the sale of fixed-rate loans. During the quarter ended March 31, 2006, the Bank sold $5.52 million in fixed rate one-to-four family mortgages for a gain of $88,000 compared to sales of $4.63 million for a gain of $84,000 for the quarter ended March 31, 2005. Total non-interest income increased by $186,000 to $3.06 million for the six months ended March 31, 2006 from $2.88 million for the six months ended March 31, 2005, primarily as a result of a $179,000 increase in fees from the sale of non-deposit investment products, a $118,000 increase in service charges on deposits, and a $98,000 increase in servicing income on loans sold. These increases were partially offset by a $228,000 decrease in gains from loan sales. Income from loan sales was larger in the period a year as a result of the sale of the Bank's credit card portfolio in December 2004, which resulted in a gain of $245,000. Non-interest Expense: Total non-interest expense increased by $48,000 to $4.72 million for the quarter ended March 31, 2006 from $4.67 million for the quarter ended March 31, 2005. The increase was primarily a result of a $189,000 increase in salary expense, a $65,000 increase in premises and equipment expense, and an increase of $17,000 in state and local tax expense. These increases were partially offset by decreases of $33,000 24
in advertising expense, $36,000 real estate owned operation expense, and $11,000 in postage and courier expense Total non-interest expense decreased by $76,000 to $9.36 million for the six months ended March 31, 2006 from $9.43 million for the six months ended March 31, 2005. Non-interest expenses were higher a year ago primarily attributable to expenses of $183,000 related to the branch acquisition in October 2004 and vesting expenses of $335,000 related to one of the Company's benefit plans. Partially offsetting these expense decreases during the current year, were increases in expenses related to salaries and employee benefits, premises and equipment, and state and local taxes. The Company also began expensing stock options under SFAS 123(R), which became effective for the Company on October 1, 2005. Total compensation expense related to stock options of $11,000 was recorded for the six months ended March 31, 2006. As a result of the decreased expenses and increased revenue, the Company's efficiency ratio improved to 61.74% for the six months ended March 31, 2006 from 68.98% for the six months ended March 31, 2005. Provision for Income Taxes: The provision for income taxes increased to $906,000 for the quarter ended March 31, 2006 from $624,000 for the quarter ended March 31, 2005 primarily as a result of increased net income before taxes. The Company's effective tax rate was 31.8% for the quarter ended March 31, 2006 and 30.1% for the quarter ended March 31, 2005. The higher effective tax rate was primarily as a result of a lower percentage of tax exempt income during the current quarter. The provision for income taxes increased to $1.85 million for the six months ended March 31, 2006 from $1.28 million for the six months ended March 31, 2005 primarily as a result of increased net income before taxes. The Company's effective tax rate was 31.9% for the six months ended March 31, 2006 and 30.2% for the six months ended March 31, 2005. The higher effective tax rate was primarily as a result of a lower percentage of tax exempt income during the current period. 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, 2006. 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 increased by $2.57 million to $31.29 million at March 31, 2006 from $28.72 million at September 30, 2005. The Company's liquid assets increased primarily due to an increase in the level of federal funds sold. 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, 2006, 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 11.74%. The Bank also 25
maintained an uncommitted credit facility with the FHLB of Seattle that provided for immediately available advances up to an aggregate amount of $141.04 million, under which $61.79 million was outstanding at March 31, 2006. 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, construction and land development loans, and consumer loans. At March 31, 2006, the Bank had loan commitments totaling $29.11 million and undisbursed loans in process totaling $52.87 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, 2006 totaled $116.31 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, 2006, the Bank was in compliance with all applicable capital requirements. For additional details see the section below entitled "Regulatory Capital." Regulatory Capital - ------------------ The following table compares the Bank's regulatory capital at March 31, 2006 to its minimum regulatory capital requirements at that date (in thousands): Percent of Amount Adjusted Total Assets (1) ------ ------------------------- Tier 1 (leverage) capital $61,700 11.36% Tier 1 (leverage) capital requirement 21,726 4.00 ------- ----- Excess $39,974 7.36% ======= ===== Tier 1 risk adjusted capital $61,700 15.64% Tier 1 risk adjusted capital requirement 15,776 4.00 ------- ----- Excess $45,924 11.64% ======= ===== Total risk based capital $65,819 16.69% Total risk based capital requirement 31,552 8.00 ------- ----- Excess $34,267 8.69% ======= ===== - ------------------- (1) For the Tier 1 (leverage) capital, percent of total average assets of $543.15 million. For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $394.40 million. 26
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES KEY FINANCIAL RATIOS AND DATA (Dollars in thousands, except per share data) Three Months Ended March 31, Six Months Ended March 31, 2006 2005 2006 2005 ---------------------------- -------------------------- PERFORMANCE RATIOS: Return on average assets (1) 1.41% 1.10% 1.44% 1.12% Return on average equity (1) 10.18% 7.95% 10.44% 8.06% Net interest margin (1) 4.84% 4.54% 4.85% 4.56% Efficiency ratio 62.33% 69.04% 61.74% 68.98% March 31, September 30, 2006 2005 -------------------------------- ASSET QUALITY RATIOS: Non-performing loans $ 2,040 $ 2,926 OREO & other repossessed assets 110 509 Total non-performing assets 2,150 3,435 Non-performing assets to total assets 0.39% 0.62% Allowance for loan losses to non-performing loans 201.91% 140.09% Book value per share (2) $ 20.59 $ 19.85 Book value per share (3) $ 21.98 $ 21.30 Tangible book value per share (2) (4) $ 18.65 $ 17.86 Tangible book value per share (3) (4) $ 19.91 $ 19.16 - ---------------- (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 March 31, Six Months Ended March 31, 2006 2005 2006 2005 ---------------------------- -------------------------- AVERAGE BALANCE SHEET: - --------------------- Average total loans $397,880 $371,509 $394,290 $365,021 Average total interest earning assets 500,835 477,946 498,030 473,730 Average total assets 553,210 527,453 550,792 525,958 Average total interest bearing liabilities: Average total interest bearing deposits 361,893 357,825 361,755 352,740 Average FHLB advances & other borrowings 62,176 54,597 59,528 55,010 Average shareholders' equity 76,470 72,962 75,729 73,049 27
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, 2005 . 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 "Exchange 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 Exchange 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: There have been no changes in our internal ---------------------------- control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company continued, however, to implement suggestions from its internal auditor and independent auditors 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; as over time, controls may 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 - --------------------------------------------------------------------- The following table sets forth the shares repurchased by the Company during the quarter: 28
Total No. of Shares Purchased as Maximum No. Total Part of of Shares that No. of Average Publicly May Yet Be Shares Price Paid Announced Purchased Period Purchased per Share Plan Under the Plan(1) - ----------------------- --------- ---------- ----------- --------------- 01/01/2006 - 01/31/2006 - - $ - - - - 151,905 02/01/2006 - 02/28/2006 - - - - - - 151,905 03/01/2006 - 03/31/2006 - - - - - - 151,905 ----- ------ ----- Total - - $ - - - - ===== ====== ===== (1) On April 7,2005, the Company announced a share repurchase plan authorizing the repurchase of up to 5% of its outstanding shares, or 187,955 shares. As of March 31, 2006, a total of 36,050 shares had been repurchased at an average price of $23.26 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 - ------------------------------------------------------------- The Company's 2005 Annual Meeting of Shareholders was held on January 24, 2006 at the Hoquiam Timberland Library, 420 7th Street, Hoquiam, Washington. The results of the vote on the election of directors, the only item presented at the meeting, was as follows: For Withheld No. of Votes Percentage No. of Votes Percentages ------------------------- -------------------------- Clarence E. Hamre 3,352,426 98.88% 38,061 1.12% (three-year term) Andrea M. Clinton 3,356,965 99.01% 33,522 0.99% (three-year term) Ronald A. Robbel 3,355,556 98.97% 34,931 1.03% (three-year term) The following directors, who were not up for re-election at the Annual Meeting of Shareholders, will continue to serve as directors: Michael R. Sand, David A. Smith, Harold L. Warren, Jon C. Parker and James C. Mason. Item 5. Other Information - --------------------------- None to be reported. 29
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) 10.6 Form of Incentive Stock Option Agreement (6) 10.7 Form of Non-qualified Stock Option Agreement (6) 10.8 Form of Management Recognition and Development Award Agreement (6) 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 906 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 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 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. (6) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2005. 30
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 8, 2006 By: /s/Michael R. Sand -------------------------------- Michael R. Sand Chief Executive Officer (Principal Executive Officer) Date: May 8, 2006 By: /s/Dean J. Brydon --------------------------------- Dean J. Brydon Chief Financial Officer (Principal Financial Officer) 31
EXHIBIT INDEX Exhibit No. Description of Exhibit 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 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 32
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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 8, 2006 /s/Michael R. Sand ------------------------------ Michael R. Sand Chief Executive Officer 33
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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 8, 2006 /s/Dean J. Brydon ---------------------------- Dean J. Brydon Chief Financial Officer 34
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 8, 2006 35