UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 JANUARY 31, 2007
----- ---------------------------------------
Common stock, $.01 par value 3,670,861
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 14-27
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 28
Market Risk
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 1A Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and 29
Use of Proceeds
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 29-30
SIGNATURES 31
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2006 and September 30, 2006
Dollars in thousands, except share amounts
December 31, September 30,
2006 2006
---------------------------
Assets (Unaudited)
Cash equivalents:
Non-interest bearing $ 17,764 $ 14,870
Interest bearing deposits in banks 2,747 2,519
Federal funds sold 4,655 5,400
------------------------
25,166 22,789
------------------------
Certificate of deposits ("CDs") held for investment 100 100
Investments and mortgage-backed securities: held
to maturity 73 75
Investments and mortgage-backed securities: available
for sale 69,772 81,408
Federal Home Loan Bank ("FHLB") stock 5,705 5,705
Loans receivable 454,736 426,318
Loans held for sale 1,255 2,449
Less: Allowance for loan losses (4,121) (4,122)
------------------------
Net loans receivable 451,870 424,645
------------------------
Accrued interest receivable 2,884 2,806
Premises and equipment 16,756 16,730
Other real estate owned ("OREO") and other
repossessed items 2 15
Bank owned life insurance ("BOLI") 12,065 11,951
Goodwill 5,650 5,650
Core deposit intangible 1,434 1,506
Mortgage servicing rights 964 932
Other assets 1,737 2,775
------------------------
Total assets $ 594,178 $ 577,087
========================
Liabilities and shareholders' equity
Deposits $ 434,249 $ 431,061
FHLB advances 78,446 62,761
Other borrowings: repurchase agreements 1,322 947
Other liabilities and accrued expenses 2,881 2,953
------------------------
Total liabilities 516,898 497,722
------------------------
Commitments and contingencies -- --
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued
Common stock, $.01 par value; 50,000,000 shares
authorized;
December 31, 2006 - 3,670,861 shares issued a
and outstanding
September 30, 2006 - 3,757,676 shares issued
and outstanding 37 38
Additional paid in capital 17,380 20,888
Unearned shares - Employee Stock Ownership
Plan ("ESOP") (3,239) (3,305)
Unearned shares- Management Recognition and
Development Plan ("MRDP") (233) (188)
Retained earnings 64,209 62,933
Accumulated other comprehensive loss (874) (1,001)
------------------------
Total shareholders' equity 77,280 79,365
------------------------
Total liabilities and shareholders' equity $ 594,178 $ 577,087
========================
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 2006 and 2005
Dollars in thousands, except per share amounts
(unaudited)
Three Months
Ended December 31,
2006 2005
------------------
Interest and dividend income
Loans receivable $8,786 $7,485
Investments and mortgage-backed securities 454 536
Dividends from investments 420 323
Federal funds sold 65 77
Interest bearing deposits in banks 39 24
------------------
Total interest and dividend income 9,764 8,445
------------------
Interest expense
Deposits 2,589 1,688
FHLB advances - short term 359 709
FHLB advances - long term 523 11
Other borrowings 17 10
------------------
Total interest expense 3,488 2,418
------------------
Net interest income 6,276 6,027
Provision for loan losses -- --
------------------
Net interest income after provision for loan losses 6,276 6,027
------------------
Non-interest income
Service charges on deposits 706 720
Gain on sale of loans, net 107 116
BOLI net earnings 114 111
Escrow fees 31 32
Servicing income on loans sold 132 108
ATM transaction fees 263 235
Other 128 233
------------------
Total non-interest income 1,481 1,555
------------------
Non-interest expense
Salaries and employee benefits 2,785 2,630
Premises and equipment 624 609
Advertising 177 136
Loss (gain) from real estate operations (17) (53)
ATM expenses 119 98
Postage and courier 105 115
Amortization of core deposit intangible 72 82
State and local taxes 139 160
Professional fees 177 187
Other 716 673
------------------
Total non-interest expense 4,897 4,637
------------------
Income before federal income taxes 2,860 2,945
Federal income taxes 906 939
------------------
Net income $1,954 $2,006
==================
Earnings per common share:
Basic $0.56 $0.57
Diluted $0.54 $0.55
Weighted average shares outstanding:
Basic 3,503,883 3,504,526
Diluted 3,623,108 3,625,620
Dividends paid per share: $ 0.18 $ 0.16
See notes to unaudited condensed consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended September 30, 2006 and the three months ended December 31, 2006
Dollars in thousands, except per share amounts and common stock shares
Accumu-
lated
Unearned Unearned Other
Shares Shares Compre-
Common Common Additional Issued Issued hensive
Stock Shares Stock Paid-In to to Retained Income
Outstanding Amount Capital ESOP MRDP Earnings (Loss) Total
----------- ------- -------- -------- ------- -------- ------ ---------
Balance, Sept. 30, 2005 3,759,937 $38 $22,040 ($3,833) - - $57,268 ($871) $74,642
Net income - - - - - - - - - - 8,157 - - 8,157
Issuance of MRDP shares 6,000 - - 195 - - (195) - - - - - -
Repurchase of
common stock (108,600) (1) (3,700) - - - - - - - - (3,701)
Exercise of stock
options 100,339 1 1,827 - - - - - - - - 1,828
Cash dividends
($.66 per share) - - - - - - - - - - (2,492) - - (2,492)
Earned ESOP shares - - - - 480 528 - - - - - - 1,008
Earned MRDP shares - - - - (4) - - 7 - - - - 3
Stock option compensation exp. - - - - 50 - - - - - - - - 50
Change in fair value of
securities available
for sale, net of tax - - - - - - - - - - - - (130) (130)
Balance, Sept. 30, 2006 3,757,676 38 20,888 (3,305) (188) 62,933 (1,001) 79,365
(Unaudited)
Net income - - - - - - - - - - 1,954 - - 1,954
Issuance of MRDP shares 1,540 - - 56 - - (56) - - - - - -
Repurchase of
common stock (112,505) (1) (4,175) - - - - - - - - (4,176)
Exercise of stock options 24,150 - - 509 - - - - - - - - 509
Cash dividends
($.18 per share) - - - - - - - - - - (678) - - (678)
Earned ESOP shares - - - - 95 66 - - - - - - 161
Earned MRDP shares - - - - - - - - 11 - - - - 11
Stock option compensation
exp. - - - - 7 - - - - - - - - 7
Change in fair value of
securities available
for sale, net of tax - - - - - - - - - - - - 127 127
Balance, December
31, 2006 3,670,861 $37 $17,380 ($3,239) ($233) $64,209 ($874) $77,280
See notes to unaudited condensed consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2006 and 2005
In thousands
(unaudited)
Three Months
Ended December 31,
2006 2005
Cash flow from operating activities ---------------------
Net income $ 1,954 $ 2,006
Non-cash revenues, expenses, gains and losses
included in income:
Depreciation 253 245
Amortization of core deposit intangible 72 82
Earned ESOP shares 66 132
Earned MRDP shares 11 - -
Stock option compensation expense 7 5
Stock option tax effect less excess tax benefit 69 6
Gain on sale of other real estate owned, net (18) (52)
Gain on sale of premises and equipment (5) - -
BOLI cash surrender value increase (114) (110)
Gain on sale of loans (107) (116)
Increase (decrease) in deferred loan origination fees 91 (82)
Loans originated for sale (5,944) (6,309)
Proceeds from sale of loans 7,245 7,533
Decrease in other assets, net 871 450
Decrease in other liabilities and accrued expenses, net (72) (318)
---------------------
Net cash provided by operating activities 4,379 3,472
Cash flow from investing activities
Proceeds from maturities of securities available
for sale 11,821 1,480
Proceeds from maturities of securities held to maturity 1 14
Increase in loans receivable, net (28,512) (4,503)
Additions to premises and equipment (279) (433)
Proceeds from the disposition of premises and equipment 5 - -
Proceeds from sale of other real estate owned 33 441
---------------------
Net cash used in investing activities (16,931) (3,001)
Cash flow from financing activities
Increase (decrease) in deposits, net 3,188 (989)
Increase (decrease) in FHLB advances - long term 29,985 (3,500)
Decrease in FHLB advances - short term (14,300) (2,048)
Increase in repurchase agreements 375 524
Proceeds from exercise of stock options 290 67
ESOP tax effect 95 75
Stock option excess tax benefit 150 13
Purchase and retirement of common stock (4,176) (193)
Payment of dividends (678) (602)
---------------------
Net cash provided by (used in) financing activities 14,929 (6,653)
Net increase (decrease) in cash equivalents 2,377 (6,182)
Cash equivalents
Beginning of period 22,789 28,518
---------------------
End of period $ 25,166 $ 22,336
=====================
See notes to unaudited condensed consolidated financial statements
(continued)
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the three months ended December 31, 2006 and 2005
In thousands
(unaudited)
Three Months
Ended December 31,
2006 2005
---------------------
Supplemental disclosure of cash flow information
Income taxes paid $ 833 $ 385
Interest paid 3,444 2,395
Supplemental disclosure of non-cash investing
activities
Market value adjustment of securities held for
sale, net of tax 127 (196)
Loans transferred to OREO and other repossessed assets 2 24
Supplemental disclosure of non-cash financing activities
Shares issued to MRDP 56 - -
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31, 2006 and 2005
In thousands
(unaudited)
Three Months
Ended December 31,
2006 2005
------------------
Comprehensive income:
Net income $1,954 $2,006
Increase (decrease) in fair value of securities
available for sale, net of tax 127 (196)
------------------
Total comprehensive income $2,081 $1,810
==================
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,
2006 ("2006 Form 10-K"). The results of operations for the three months ended
December 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 inter-company balances
have been eliminated in consolidation.
(c) Operating Segments: Internal financial information is recorded for
individual Bank branch offices, escrow services and the sale of non-deposit
investment products. For financial statement purposes, the branch offices are
aggregated into one reportable operating segment and the escrow division and
non-deposit investment product division are not considered material.
Accordingly, all operations of the Company are aggregated into one reportable
operating segment.
(d) 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.
(e) Certain prior period amounts have been reclassified to conform to the
December 31, 2006 presentation with 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, 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 December 31, 2006 and 2005, there
were 220,415 and 255,682 ESOP shares, respectively, that had not been
allocated.
9
Three Months Ended December 31,
2006 2005
-------------------------------
(In thousands, except share
and per share data)
Basic EPS computation
Numerator - net income $ 1,954 $ 2,006
Denominator - weighted average
common shares outstanding 3,503,883 3,504,526
--------- ---------
Basic EPS $ 0.56 $ 0.57
Diluted EPS computation
Numerator - net income $ 1,954 $ 2,006
Denominator - weighted average
common shares outstanding 3,503,883 3,504,526
Effect of dilutive stock options 118,499 121,094
Effect of dilutive MRDP shares 726 - -
--------- ---------
Weighted average common shares
and common stock equivalents 3,623,108 3,625,620
========= =========
Diluted EPS $ 0.54 $ 0.55
(3) STOCK BASED COMPENSATION
On October 1, 2005, the Company adopted SFAS No. 123(R) 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 (i.e., the 1999 Stock Option Plan and
the 2003 Stock Option Plan), the Company may grant options for up to a
combined total of 811,250 shares of common stock to employees, officers and
directors. Shares issued may be purchased in the open market or may be issued
from authorized and unissued shares. The exercise price of each option equals
the fair market value of the Company's common stock on the date of grant. The
options vest over a ten-year period, which may be accelerated if the Company
meets certain performance criteria. Generally, options vest in annual
installments 10% on each of the ten anniversaries from the date of the grant
and 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 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. At December 31, 2006, options for 139,208 shares are
available for future grant under these plans.
10
Following is activity under the plans:
Three Months Ended
December 31, 2006
Total Options Outstanding
------------------------------
Weighted
Weighted Average
Average Grant Date
Exercise Fair
Shares Price Value
------ ----- -----
Options outstanding, beginning of period 262,072 $14.51 $3.70
Exercised (24,150) 12.01 3.25
Granted -- -- --
-------
Options outstanding, end of period 237,922 $14.76 $3.74
Options exercisable, end of period 215,918 $14.46 $3.68
Three Months Ended
December 31, 2005
Total Options Outstanding
------------------------------
Weighted
Weighted Average
Average Grant Date
Exercise Fair
Shares Price Value
------ ----- -----
Options outstanding, beginning of period 362,411 $13.86 $3.58
Exercised (5,300) 12.72 3.45
Granted -- -- --
-------
Options outstanding, end of period 357,111 $13.88 $3.59
Options exercisable, end of period 318,771 $13.50 $3.52
The aggregate intrinsic value of all options outstanding at December 31, 2006
was $5.32 million. The aggregate intrinsic value of all options that were
exercisable at December 31, 2006 was $4.89 million. The aggregate intrinsic
value of all options outstanding at December 31, 2005 was $3.42 million. The
aggregate intrinsic value of all options that were exercisable at December 31,
2005 was $3.18 million.
Three Months Ended
December 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 22,504 $4.29 38,840 $4.17
Vested (500) 3.22 (500) 3.22
Granted -- -- -- --
------ ----- ------ -----
Unvested options, end of period 22,004 $4.31 38,340 $4.18
11
The total fair value of options vested during the three months ended December
31, 2006 was $2,000. The total fair value of options vested during the three
months ended December 31, 2005 was $1,000.
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Three Months Ended
December 31,
------------------
(In Thousands)
2006 2005
---- ----
Proceeds from options exercised $290 $ 67
Related tax benefit recognized 219 19
Intrinsic value of options exercised 562 56
Options outstanding at December 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)
------------ ------ ------ ----------- ------ ----- -----------
$12.00-12.38 138,405 $12.01 2.2 138,405 $12.01 2.2
13.59-14.90 33,339 14.70 4.4 30,005 14.70 4.4
15.20-15.96 7,000 15.61 5.3 2,500 15.60 5.3
19.05 28,340 19.05 6.2 14,170 19.05 6.2
22.92-23.25 30,838 23.06 7.0 30,838 23.06 7.0
------- -------
237,922 $14.76 3.7 215,918 $14.46 3.5
Options outstanding at December 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)
------------ ------ ------- ----------- ------ ----- -----------
$12.00-12.38 253,594 $12.01 3.1 252,594 $12.01 3.1
13.59-14.90 33,339 14.70 5.4 23,337 14.70 5.4
15.20-15.96 11,000 15.54 6.2 3,500 15.54 6.1
19.05 28,340 19.05 7.2 8,502 19.05 7.2
22.92-23.25 30,838 23.06 8.0 30,838 23.06 8.0
------- -------
357,111 $13.88 4.2 318,771 $13.50 3.9
There were no options granted during the three months ended December 31, 2006
and December 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 employees, officers and directors of
the Company. The objective of the MRDP is to retain and attract 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. Shares may be purchased in the open market or may
be issued from authorized and unissued shares. Awards under the MRDP are made
in the form of restricted shares of common stock that are 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 is recognized over a five-year vesting period, with 20% vesting
on each of the five anniversaries from the date of the grant. During the
three months ended December 31, 2006 the Company awarded 1,540 shares to
directors. These shares had a weighted average grant date fair value of
$36.48 per share. There were no MRDP shares granted during the three months
ended December 31, 2005.
At December 31, 2006 there were a total of 7,540 unvested MRDP shares with a
weighted average grant date fair value of $33.26. There were no MRDP shares
that vested during the three months ended December 31, 2006 and 2005. At
December 31, 2006, there were 52,033 shares available for future grant under
the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Three Months Ended December 31,
2006 2005
------------------------------------
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized
in income $ 7 $ 11 $ 5 $ - -
Related tax benefit recognized 2 4 2 - -
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 2007 $ 20 $ 38 $ 58
2008 5 50 55
2009 2 50 52
2010 1 50 51
2011 -- 44 44
2012 -- 1 1
---- ---- ----
Total $ 28 $233 $261
(5) DIVIDEND / SUBSEQUENT EVENT
On January 24, 2007, the Company announced a quarterly cash dividend of $0.18
per common share, payable February 23, 2007, to shareholders of record as of
the close of business on February 9, 2007.
13
(6) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS" or "Statement") No. 157,
Fair Value Measurements, which defines fair value, establishes a framework for
measuring fair value under Generally Accepted Accounting Principles ("GAAP"),
and expands disclosures about fair value measurements. This Statement expands
other accounting pronouncements that require or permit fair value
measurements. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Management is assessing the impact of adoption of SFAS
157 on the Company's consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements, providing guidance on quantifying financial statement misstatement
and implementation (e.g., restatement or cumulative effect to assets,
liabilities and retained earnings) when first applying this guidance. SAB 108
is effective for the Company for all financial statements issued after
November 15, 2006 and is not expected to have a material effect on the
Company's consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109
("FIN 48"). The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. The new
interpretation is effective for fiscal years beginning after December 15,
2006. The Company will adopt the provisions of FIN 48 on October 1, 2007 and
is currently evaluating FIN 48 to determine the effect the guidance will have
on the Company's consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets. SFAS No. 156 amends Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, to require all separately 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 recorded 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
adopted SFAS No. 156 on October 1, 2006 and will continue to measure servicing
assets at the lower of cost or market.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
-------------------------------------------------------------------------
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three months
ended December 31, 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
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; technological factors
affecting operations; and other risks detailed in the Company's reports filed
with the SEC, including its 2006 Form 10-K. Accordingly, these factors should
be considered in evaluating forward-looking statements,
14
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., a Washington corporation, was organized on September
8, 1997 for the purpose of becoming the holding company for Timberland Savings
Bank, SSB 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 December 31, 2006, the
Company had total assets of $594.18 million and total shareholders' equity of
$77.28 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." In 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 State Department of Financial Institutions, Division of Banks
and the FDIC.
The Bank is a community-oriented bank which offers a variety of deposit and
loan products to its customers. The Bank operates 21 branches (including its
main office in Hoquiam) and a loan production office 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. 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 comprehensive 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.
15
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 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 on 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 December 31, 2006 and September 30, 2006
The Company's total assets increased by $17.09 million to $594.18 million at
December 31, 2006 from $577.09 million at September 30, 2006, primarily
attributable to a $27.22 million increase in net loans receivable and a $2.38
million increase cash equivalents. This increase was partially offset by an
$11.64 million decrease in investment and mortgage-backed securities.
Total deposits increased by $3.19 million to $434.25 million at December 31,
2006 from $431.06 million at September 30, 2006 primarily attributable to an
increase in certificate of deposit accounts. Shareholders' equity decreased
by $2.09 million to $77.28 million at December 31, 2006 from $79.37 million at
September 30, 2006 as the Company repurchased shares totaling $4.18 million.
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash Equivalents: Cash equivalents increased to $25.17 million at December 31,
2006 from $22.79 million at September 30, 2006. The increase was primarily a
result of non-interest bearing accounts and interest bearing deposits in banks
increasing by $3.12 million to $20.51 million at December 31, 2006 from $17.39
million at September 30, 2006. The increase was partially offset by a
decrease of $745,000 in federal funds sold to $4.66 million at December 31,
2006 from $5.40 million at September 30, 2006.
Investment Securities and Mortgage-backed Securities: Investment and
mortgage-backed securities decreased by $11.64 million or 14.3% to $69.84
million at December 31, 2006 from $81.48 million at September 30, 2006, as a
result of regular amortization and prepayments on mortgage-backed securities
and the maturity or call of U.S. agency securities. At December 31, 2006, the
Company's securities' portfolio was comprised of mutual funds of $32.03
million, U.S. agency securities of $20.83 million, and mortgage-backed
securities of $16.99 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 $27.22 million to $451.87 million at
December 31, 2006 from $424.65 million at September 30, 2006. The increase in
the portfolio was primarily a result of a $16.38 million increase in
construction loans (net of undisbursed portion of construction loans in
process), a $5.39 million increase in land loans, a $2.09 million increase in
commercial real estate loans, and $1.50 million increase in one- to
four-family loans.
16
Loan demand remained strong as loan originations totaled $80.76 million for
the three months ended December 31, 2006 compared to $65.78 million for three
months ended December 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 $7.24 million for three
months ended December 31, 2006 compared to $7.53 million for the three months
ended December 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: OREO (other real estate
owned) and other repossessed items decreased to $2,000 at December 31, 2006
from $15,000 at September 30, 2005 as one land parcel was sold. At December
31, 2006, OREO and other repossessed items consisted of one vehicle. For
additional information, see the section entitled "Non-performing Assets"
included herein.
Premises and Equipment: Premises and equipment increased by $26,000 to $16.76
million at December 31, 2006 from $16.73 million at September 30, 2006.
Goodwill and Core Deposit Intangible: The value of goodwill remained
unchanged. The amortized value of core deposit intangible decreased $71,000
to $1.43 million at December 31, 2006 from $1.50 million at September 30,
2006. The decrease is attributable to scheduled amortization of the core
deposit intangible.
Deposits: Deposits increased by $3.19 million to $434.25 million at December
31, 2006 from $431.06 million at September 30, 2006. The deposit increase was
primarily a result of a $3.68 million increase in certificate of deposit
accounts, a $2.28 million increase in money market accounts, and a $1.09
million increase in savings accounts. These increases were partially offset
by decreases of $2.78 million in non-interest bearing accounts and $1.08
million in N.O.W. checking accounts. For additional information, see the
section entitled "Deposit Breakdown" included herein.
FHLB Advances and Other Borrowings: FHLB advances and other borrowings
increased by $16.06 million to $79.77 million at December 31, 2006 from $63.71
million at September 30, 2006 as the Bank used additional advances to fund
loan portfolio growth. For additional information, see "FHLB Advance Maturity
Schedule" included herein.
Shareholders' Equity: Total shareholders' equity decreased by $2.09 million
to $77.28 million at December 31, 2006 from $79.37 million at September 30,
2006, primarily as a result of share repurchases of $4.18 million and
dividends to shareholders of $678,000. These decreases to shareholders'
equity were partially offset by net income of $1.95 million, an increase of
$509,000 to additional paid in capital from the exercise of stock options, and
a $127,000 net increase in the fair value of securities available for sale.
During the quarter the Company repurchased 112,505 shares for $4.18 million as
it completed its current share repurchase program and announced an additional
5% share repurchase program. The 112,505 shares were repurchased at an
average price of $37.12 per share. Cumulatively, the Company has repurchased
3,588,226 shares (54.3%) of the 6,612,500 shares that were issued in its 1998
initial public offering, at an average price of $16.64 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 were 0.04% at
December 31, 2006 compared to 0.02% at September 30, 2006, as total
non-performing assets increased to $241,000 at December 31, 2006 from $95,000
at September 30, 2006.
The non-performing asset total of $241,000 at December 31, 2006 consisted of
three single family mortgage loans, two consumer loans and one repossessed
vehicle. The Company had a net charge-off of $1,000 during
17
the three months ended December 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 December 31, At September 30,
2006 2006
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Held-to-maturity:
Mortgage-backed securities $ 73 0.10% $ 75 0.09%
Available-for-sale (at fair value)
U.S. agency securities 20,828 29.82 31,718 38.93
Mortgage-backed securities 16,917 24.22 17,603 21.60
Mutual funds 32,027 45.86 32,087 39.38
--------- ------ --------- ------
Total portfolio $ 69,845 100.00% $ 81,483 100.00%
========= ====== ========= ======
Loan Portfolio Composition
--------------------------
The following table sets forth the composition of the Company's loan portfolio
by type of loan.
At December 31, At September 30,
2006 2006
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Mortgage Loans:
One- to four-family (1) $100,204 19.1% $98,709 20.1%
Multi-family 18,391 3.5 17,689 3.6
Commercial 139,700 26.6 137,609 28.1
Construction and
land development 170,788 32.5 146,855 29.9
Land 34,986 6.6 29,598 6.0
-------- ----- -------- -----
Total mortgage loans 464,069 88.3 430,460 87.7
Consumer Loans:
Home equity and second mortgage 38,434 7.3 37,435 7.6
Other 11,051 2.1 11,127 2.3
-------- ----- -------- -----
49,485 9.4 48,562 9.9
Commercial business loans 12,136 2.3 11,803 2.4
-------- ----- -------- -----
Total loans 525,690 100.0% 490,825 100.0%
===== =====
Less:
Undisbursed portion of
construction loans in process (66,810) (59,260)
Deferred loan origination fees (2,889) (2,798)
Allowance for loan losses (4,121) (4,122)
-------- --------
Total loans receivable, net $451,870 $424,645
======== ========
--------
(1) Includes loans held-for-sale.
18
Construction and Land Development Loan Portfolio Composition
------------------------------------------------------------
The following table sets forth the composition of the Company's construction
and land development loan portfolio.
At December 31, At September 30,
2006 2006
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Custom and owner/builder const. $ 47,556 27.84% $ 46,346 31.56%
Speculative construction 37,178 21.77 34,363 23.40
Commercial real estate 55,536 32.52 42,398 28.87
Multi-family 13,822 8.09 7,662 5.22
Land development 16,696 9.78 16,086 10.95
-------- ------ -------- ------
Total construction loans $170,788 100.00% $146,855 100.00%
======== ====== ======== ======
Activity in the Allowance for Loan Losses
-----------------------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
December 31,
2006 2005
--------------------
(In thousands)
Balance at beginning of period $4,122 $4,099
Provision for loan losses - - - -
Loans charged off (1) - -
Recoveries on loans previously charged off - - 18
------ ------
Net recoveries (charge-offs) (1) 18
------ ------
Balance at end of period $4,121 $4,117
====== ======
19
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets.
At December 31, At September 30,
2006 2006
--------------- ---------------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 163 $ 80
Consumer loans 76 - -
Commercial business loans - - - -
-------- --------
Total 239 80
Accruing loans which are contractually
past due 90 days or more: - - - -
-------- --------
Total - - - -
Total of non-accrual and 90 days past
due loans 239 80
Other real estate owned and other
repossessed items 2 15
-------- --------
Total non-performing assets $ 241 $ 95
======== ========
Restructured loans - - - -
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 0.05% 0.02%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 0.04% 0.01%
Non-performing assets as a percentage
of total assets 0.04% 0.02%
Loans receivable (1) $455,991 $428,767
======== ========
Total assets $594,178 $577,087
======== ========
(1) Includes loans held-for-sale and is before the allowance for loan losses.
20
Deposit Breakdown
-----------------
The following table sets forth the balances of deposits in the various types
of accounts offered by the Bank.
At At
December 31, 2006 September 30, 2006
----------------- ------------------
(In thousands)
Non-interest bearing $ 55,121 $ 57,905
N.O.W. checking 88,428 89,509
Savings 61,324 60,235
Money market accounts 44,660 42,378
Certificates of deposit
under $100,000 126,819 128,183
Certificates of deposit
$100,000 and over 57,897 52,851
-------- --------
Total Deposits $434,249 $431,061
======== ========
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 December 31, At September 30,
2006 2006
Amount Percent Amount Percent
------------------ ------------------
(Dollars in thousands)
Short-term $14,700 18.74% $29,000 46.21%
Long-term 63,746 81.26 33,761 53.79
------- ------ ------- ------
Total FHLB advances $78,446 100.00% $62,761 100.00%
======= ====== ======= =======
The Bank's FHLB borrowings mature at various dates through December 2016 and
bear interest at rates ranging from 4.10% to 6.18%. Principal reduction
amounts due for future years ending September 30 are as follows (in
thousands):
2007 $23,749
2008 15,069
2009 4,628
2010 - -
2011 - -
Thereafter 35,000
-------
Total $78,446
=======
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
21
Comparison of Operating Results for the Three Months Ended December 31, 2006
and 2005
The Company's net income decreased by $52,000 to $1.95 million for the quarter
ended December 31, 2006 from $2.01 million for the quarter ended December 31,
2005. Diluted earnings per share decreased to $0.54 for the quarter ended
December 31, 2006 from $0.55 for the quarter ended December 31, 2005.
The decreased net income for the quarter ended December 31, 2006 was primarily
a result of increased non-interest expense and decreased non-interest income,
which were partially offset by increased net interest income. Increased
employee and advertising expenses in addition to expenses associated with
expanding the Bank's lending team were primarily responsible for the increased
non-interest expense. The Bank made significant investments in its lending
operations during the last nine months as a number of experienced lenders were
added. While these personnel investments produced a significant increase in
loan originations and net loans outstanding during the past two quarters, they
have also led to increased salary and benefit expenses.
Net interest income increased during the current quarter as a result of a
larger interest earning asset base, however, margin compression resulting from
higher funding costs mitigated the impact of this growth. Following the
industry trend and a flat yield curve environment, the net interest margin
compressed to 4.74% for the quarter ended December 31, 2006. In the same
quarter one year ago, the Company's net interest margin of 4.87% was increased
by 11 basis points as a result of the collection of $131,000 ($86,000 net of
tax) of non-accrual interest, late payment penalties and prepayment penalties.
This added $0.02 per diluted share to the December 31, 2005 quarter's
earnings.
A more detailed explanation of the income statement categories is presented
below.
Net Income: Net income for the quarter ended December 31, 2006 decreased to
$1.95 million, or $0.54 per diluted share ($0.56 per basic share) from $2.01
million, or $0.55 per diluted share ($0.57 per basic share) for the quarter
ended December 31, 2005. The $0.01 decrease in diluted earnings per share for
the quarter ended December 31, 2006 was primarily a result of a $260,000
($172,000 net of income tax - $0.05 per diluted share) increase in
non-interest expense and a $74,000 ($49,000 net of income tax - $0.01 per
diluted share) decrease in non-interest income. These decreases to net income
were partially offset by a $249,000 ($164,000 net of income tax - $0.05 per
diluted share) increase in net interest income.
Net Interest Income: Net interest income increased $249,000 to $6.28 million
for the quarter ended December 31, 2006 from $6.03 million for the quarter
ended December 31, 2005, primarily as a result of a larger interest earning
asset base. Total interest income increased $1.32 million to $9.76 million
for the quarter ended December 31, 2006 from $8.45 million for the quarter
ended December 31, 2005 as average total interest earning assets increased by
$34.28 million. The yield on interest earning assets increased to 7.38% for
the quarter ended December 31, 2006 from 6.82% for the quarter ended December
31, 2005. Total interest expense increased by $1.07 million to $3.49 million
for the quarter ended December 31, 2006 from $2.42 million for the quarter
ended December 31, 2005 as the average rate paid on interest bearing
liabilities increased to 3.13% for the quarter ended December 31, 2006 from
2.29% for the quarter ended December 31, 2005. The net interest margin
decreased to 4.74% for the quarter ended December 31, 2006 from 4.87% for the
quarter ended December 31, 2005. The net interest margin for the quarter
ended December 31, 2005 was increased by 11 basis points as the result of the
collection of $131,000 of non-accrual interest and prepayment penalties.
The margin compression was primarily attributable to increased funding costs
which were greater than the increased yield on interest earning assets.
Increased funding costs resulted from an increase in interest rates on
deposits and an increased reliance on FHLB advances to fund loan growth. For
additional information, see the section entitled "Rate Volume Analysis"
included herein.
22
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the net interest income on the Company. Information is provided with respect
to the (i) effects on interest income attributable to change in volume
(changes in volume multiplied by prior rate), and (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior
volume), and (iii) the net change (sum of the prior columns). Changes in
rate/volume have been allocated to rate and volume variances based on the
absolute values of each.
Three months ended December 31,
2006 compared to three months
ended December 31, 2005
increase (decrease)
due to
------
Rate Volume Net Change
---- ------ ----------
(In thousands)
Interest-earning assets:
Loans receivable (1) $341 $959 $1,300
Investments and
mortgage-backed
securities 40 (121) (81)
FHLB stock and
equity securities 96 1 97
Federal funds sold 21 (33) (12)
Interest-bearing
deposits 7 8 15
---- ----- ------
Total net increase in
income on interest-
earning assets 505 814 1,319
Interest-bearing
liabilities:
Savings accounts - (6) (6)
NOW accounts 23 (16) 7
Money market
Accounts 86 (18) 68
Certificate accounts 553 279 832
Short-term borrowings 32 323 355
Long-term borrowings 16 (202) (186)
---- ----- ------
Total net increase
in expense on interest
bearing liabilities 710 360 1,070
Net increase (decrease) in
net interest income ($205) $454 $ 249
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
23
Provision for Loan Losses: There was no provision for loan losses established
for the three months ended December 31, 2006 as credit quality remained
strong. At December 31, 2006, the Company's non-performing assets to total
assets were 0.04% and during the quarter ended December 31, 2006 the Bank's
net charge-offs were $1,000.
The Bank has established a comprehensive methodology for determining the
provision for loan losses. On a quarterly basis the Bank performs an analysis
that considers 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 an appropriate level of allowance for
loan losses. Based on its comprehensive analysis, management deemed the
allowance for loan losses of $4.12 million at December 31, 2006 (0.91% of
loans receivable and 1,724% 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 $4.12 million
(1.05% of loans receivable and 152% of non-performing loans) at December 31,
2005. The Company had a net charge-off of $1,000 for the three months ended
December 31, 2006 and a net recovery of $18,000 for the three months ended
December 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 decreased $74,000 to $1.48
million for the quarter ended December 31, 2006 from $1.56 million for the
quarter ended December 31, 2005, primarily as a result of a decrease in fee
income. Fee income from the sale of non-deposit investments products
decreased $66,000 as a result of a reduction in sales activity and service
charges on deposits decreased by $14,000. These decreases were partially
offset by increased servicing income on loans sold and increased ATM
transaction fees.
Non-interest Expense: Total non-interest expense increased by $260,000 to
$4.90 million for the quarter ended December 31, 2006 from $4.64 million for
the quarter ended December 31, 2005. The increase was primarily a result of a
$155,000 increase in salary expense, a $41,000 increase in advertising
expenses, and increases in ATM and premises and equipment expenses. The
increased salary expenses were primarily a result of hiring additional
experienced lending personnel and annual salary adjustments which are
typically effective on October 1st of each year. Primarily as a result of the
increased expenses, the Company's efficiency ratio increased to 63.13% for the
quarter ended December 31, 2006 from 61.16% for the quarter ended December 31,
2005.
Provision for Income Taxes: The provision for income taxes decreased to
$906,000 for the quarter ended December 31, 2006 from $939,000 for the quarter
ended December 31, 2005 primarily as a result of lower income before taxes.
The Company's effective tax rate was 31.68% for the quarter ended December 31,
2006 and 31.88% for the quarter ended December 31, 2005.
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,
proceeds from the sale of loans, proceeds from maturing securities, FHLB
advances, and other borrowings. 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 include a review of the Condensed Consolidated
Statement of Cash Flows for the three months ended December 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 changes in assets
and liabilities. Investing activities consist primarily of
24
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 cash equivalents increased by $2.38 million to $25.17
million at December 31, 2006 from $22.79 million at September 30, 2006. The
Company's increased liquid assets were primarily a result of increased FHLB
advances and 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 December 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 12.03%. The Bank maintained an uncommitted credit facility with the FHLB
of Seattle that provided for immediately available advances up to an aggregate
amount of $129.28 million, under which $78.5 million was outstanding at
December 31, 2006. The Bank also has a $10.0 million overnight borrowing line
with Pacific Coast Banker's Bank. At December 31, 2006, the Bank did not have
any outstanding advances on this borrowing line.
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 that exceed its ability to generate
them internally, it has additional borrowing capacity with the FHLB and
Pacific Coast Banker's Bank.
The Bank's primary investing activity is the origination of one- to
four-family mortgage loans, commercial mortgage loans, construction and land
development loans, land loans, consumer loans, and commercial business loans.
At December 31, 2006, the Bank had loan commitments totaling $42.42 million
and undisbursed loans in process totaling $66.8 million. The Bank anticipates
that it will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year
from December 31, 2006 totaled $165.03 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 December 31, 2006, the Bank was in compliance with all
applicable capital requirements. For additional details see the section below
entitled "Regulatory Capital."
25
Regulatory Capital
------------------
The following table compares the Bank's regulatory capital at December 31,
2006 to its minimum regulatory
capital requirements at that date (Dollars in thousands):
Percent of
Adjusted Total
Amount Assets (1)
------ ----------
Tier 1 (leverage) capital $60,548 10.62%
Tier 1 (leverage) capital requirement 22,795 4.00
------- -----
Excess $37,753 6.62%
======= =====
Tier 1 risk adjusted capital $60,548 13.25%
Tier 1 risk adjusted capital requirement 18,274 4.00
Excess $42,274 9.25%
======= =====
Total risk based capital $64,669 14.16%
Total risk based capital requirement 36,548 8.00
Excess $28,121 6.16%
======= =====
---------------
(1) For the Tier 1 (leverage) capital, percent of total average assets
calculation, total average of assets were $569.85 million. For the Tier 1
risk-based capital and total risk-based capital calculations, total
risk-weighted assets were $456.85 million.
26
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
For the Three Months Ended
December 31, September 30, December 31,
2006 2006 2005
--------------------------------------------
PERFORMANCE RATIOS:
Return on average assets (1) 1.35% 1.53% 1.46%
Return on average equity (1) 9.94% 10.89% 10.70%
Net interest margin (1) 4.74% 4.91% 4.87%
Efficiency ratio 63.13% 60.03% 61.16%
At At At
December 31, September 30, December 31,
2006 2006 2005
------------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 239 $ 80 $ 2,707
OREO & other repossessed assets 2 15 144
----- ---- -------
Total non-performing assets $ 241 $ 95 $ 2,851
Non-performing assets to total assets 0.04% 0.02% 0.52%
Allowance for loan losses to
non-performing loans 1,724.00% 5,152.50% 152.09%
Book value per share (2) $ 21.05 $ 21.12 $ 20.22
Book value per share (3) $ 22.37 $ 22.44 $ 21.64
Tangible book value per
share (2) (4) $ 19.12 $ 19.22 $ 18.25
Tangible book value per
share (3) (4) $ 20.32 $ 20.41 $ 19.53
-------------
(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
For the Three Months Ended
December 31, September 30, December 31,
2006 2006 2005
--------------------------------------------
AVERAGE BALANCE SHEET:
---------------------
Average total loans $439,294 $ 411,012 $390,776
Average total interest earning
assets 529,572 510,180 495,290
Average total assets 580,114 560,941 549,361
Average total interest bearing
deposits 376,365 372,371 361,620
Average FHLB advances & other
borrowings 65,970 48,518 56,939
Average shareholders' equity 78,646 78,724 74,996
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, 2006.
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 as of December 31,
2006 the Company's disclosure controls and procedures were 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 December 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 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 1A. Risk Factors
---------------------
There have been no material changes in the Risk Factors previously disclosed
in Item 1A of the Company's 2006 Form 10-K.
28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
--------------------------------------------------------------------
Not applicable
Stock Repurchases
The following table sets forth the shares repurchased by the Company during
the quarter:
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 Under
Period Purchased per Share Plan (1)(2) the Plan(1)(2)
----------------------- --------- ---------- ----------- --------------
10/01/06 - 10/31/06 - - $ - - - - 51,505
11/01/2006 - 11/30/2006 81,505 37.36 81,505 156,266
12/01/2006 - 12/31/2006 31,000 36.49 31,000 125,266
------- --------- -------
Total 112,505 $ 37.12 112,505
(1) On November 16, 2006 the Company completed its previously announced share
repurchase program. The Company repurchased 5% of its outstanding common
shares, or 187,955 shares, at an average price of $33.33 per share. All
shares were repurchased through open market broker transactions and no shares
were directly repurchased from directors or officers of the Company.
(2) On November 20, 2006, the Company announced a share repurchase plan
authorizing the repurchase of up to 5% of its outstanding shares, or 186,266
shares. As of December 31, 2006, a total of 61,000 shares had been
repurchased at an average price of $37.03 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
------------------------------------------------------------
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)
29
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: February 7, 2007 By: /s/Michael R. Sand
--------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: February 7, 2007 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: February 7, 2007 /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: February 7, 2007 /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: February 7, 2007
35