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, 2007
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, 2008
----- --------------------------------------
Common stock, $.01 par value 6,860,675
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 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-27
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 1A - Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 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 29-30
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2007 and September 30, 2007
Dollars in thousands, except share amounts
December 31, September 30,
2007 2007
-----------------------------
Assets (Unaudited)
Cash equivalents:
Non-interest bearing $ 15,301 $ 10,813
Interest bearing deposits in banks 502 2,082
Federal funds sold 1,015 3,775
------------------------
16,818 16,670
------------------------
Investments and mortgage-backed securities:
held to maturity 67 71
Investments and mortgage-backed securities:
available for sale 45,037 63,898
Federal Home Loan Bank ("FHLB") stock 5,705 5,705
Loans receivable 542,644 519,381
Loans held for sale - - 757
Less: Allowance for loan losses (5,997) (4,797)
------------------------
Net loans receivable 536,647 515,341
------------------------
Accrued interest receivable 3,407 3,424
Premises and equipment 16,512 16,575
Other real estate owned ("OREO") and other
repossessed items - - - -
Bank owned life insurance ("BOLI") 12,535 12,415
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 1,158 1,221
Mortgage servicing rights 1,071 1,051
Other assets 1,987 2,827
------------------------
Total assets $646,594 $644,848
========================
Liabilities and shareholders' equity
Deposits $461,247 $466,735
FHLB advances 106,380 99,697
Other borrowings: repurchase agreements 611 595
Other liabilities and accrued expenses 3,367 3,274
------------------------
Total liabilities 571,605 570,301
------------------------
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, 2007 - 6,917,675 shares issued
and outstanding
September 30, 2007 - 6,953,360 shares issued
and outstanding 69 70
Additional paid in capital 9,314 9,923
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,974) (3,040)
Retained earnings 69,300 68,378
Accumulated other comprehensive loss (720) (784)
------------------------
Total shareholders' equity 74,989 74,547
------------------------
Total liabilities and shareholders' equity $646,594 $644,848
========================
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, 2007 and 2006
Dollars in thousands, except per share amounts
(unaudited)
Three Months Ended Dec. 31,
2007 2006
----------------------
Interest and dividend income
Loans receivable $10,764 $8,786
Investments and mortgage-backed securities 249 454
Dividends from mutual funds and FHLB stock 423 420
Federal funds sold 31 65
Interest bearing deposits in banks 10 39
----------------------
Total interest and dividend income 11,477 9,764
----------------------
Interest expense
Deposits 3,334 2,589
FHLB advances - short term 468 359
FHLB advances - long term 748 523
Other borrowings 8 17
----------------------
Total interest expense 4,558 3,488
----------------------
Net interest income 6,919 6,276
Provision for loan losses 1,200 --
----------------------
Net interest income after provision for loan
losses 5,719 6,276
----------------------
Non-interest income
Service charges on deposits 696 706
Gain on sale of loans, net 92 107
BOLI net earnings 120 114
Servicing income on loans sold 118 132
ATM transaction fees 299 263
Fee income from non-deposit investment sales 39 20
Other 133 139
----------------------
Total non-interest income 1,497 1,481
----------------------
Non-interest expense
Salaries and employee benefits 2,920 2,785
Premises and equipment 464 624
Advertising 182 177
Loss (gain) from other real estate operations - - (17)
ATM expenses 148 119
Postage and courier 118 105
Amortization of CDI 62 72
State and local taxes 151 139
Professional fees 147 177
Other 659 716
----------------------
Total non-interest expense 4,851 4,897
----------------------
Income before federal income taxes 2,365 2,860
Federal income taxes 750 906
----------------------
Net income $ 1,615 $1,954
======================
Earnings per common share:
Basic $ 0.25 $ 0.28
Diluted $ 0.24 $ 0.27
Weighted average shares outstanding:
Basic 6,515,428 7,007,766
Diluted 6,674,773 7,246,216
Dividends paid per share:
$ 0.10 $ 0.09
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, 2007 and the three months ended December 31, 2007
Dollars in thousands, except per share amounts and common stock shares
Accumu-
lated
Unearned Other
Common Common Additional Shares Compre-
Stock Shares Stock Paid-In Issued to Retained hensive
Outstanding Amount Capital ESOP Earnings Loss Total
----------- ------- -------- --------- -------- ------ ---------
Balance, Sept. 30, 2006 7,515,352 $38 $20,700 ($3,305) $62,933 ($1,001) $79,365
Net income - - - - - - - - 8,163 - - 8,163
Stock split - - 36 - - - - (36) - - - -
Issuance of MRDP (1) shares 15,080 - - - - - - - - - - - -
Repurchase of
common stock (687,542) (4) (12,427) - - - - - - (12,431)
Exercise of stock options 110,470 - - 1,207 - - - - - - 1,207
Cash dividends
($.37 per share) - - - - - - - - (2,682) - - (2,682)
Earned ESOP shares - - - - 354 265 - - - - 619
MRDP compensation expense - - - - 64 - - - - - - 64
Stock option compensation exp. - - - - 25 - - - - - - 25
Unrealized holding gain on
securities available
for sale, net of tax - - - - - - - - - - 217 217
Balance, Sept. 30, 2007 6,953,360 $70 $9,923 ($3,040) $68,378 ($784) $74,547
(Unaudited)
Net income - - - - - - - - 1,615 - - 1,615
Stock split - - - - - - - - - - - - - -
Issuance of MRDP shares 14,315 - - - - - - - - - - - -
Repurchase of
common stock (50,000) (1) (702) - - - - - - (703)
Exercise of stock options - - - - - - - - - - - - - -
Cash dividends
($.10 per share) - - - - - - - - (693) - - (693)
Earned ESOP shares - - - - 62 66 - - - - 128
MRDP compensation expense - - - - 30 - - - - - - 30
Stock option compensation exp. - - - - 1 - - - - - - 1
Unrealized holding gain on
securities available
for sale, net of tax - - - - - - - - - - 64 64
Balance, Dec. 31, 2007 6,917,675 $69 $9,314 ($2,974) $69,300 ($720) $74,989
(1) 1998 Management Recognition and Development Plan.
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, 2007 and 2006
In thousands
(unaudited)
Three Months Ended December 31,
Cash flow from operating activities 2007 2006
---------------------
Net income $ 1,615 $ 1,954
Non-cash revenues, expenses, gains and losses
included in income:
Provision for loan losses 1,200 - -
Depreciation 283 253
Deferred federal income taxes (399) - -
Amortization of CDI 62 72
Earned ESOP shares 66 66
MRDP compensation expense 30 11
Stock option compensation expense 1 7
Stock option tax effect less excess tax benefit - - 69
Gain on sale of OREO, net - - (18)
Gain on the disposition of premises and equipment (171) (5)
BOLI cash surrender value increase (120) (114)
Gain on sale of loans (92) (107)
Increase (decrease) in deferred loan origination
fees (40) 91
Loans originated for sale (6,564) (5,944)
Proceeds from sale of loans 7,413 7,245
Decrease in other assets, net 1,225 871
Decrease (increase) in other liabilities and accrued
expenses, net 93 (72)
---------------------
Net cash provided by operating activities 4,602 4,379
Cash flow from investing activities
Proceeds from maturities of securities available
for sale 18,938 11,821
Proceeds from maturities of securities held to
maturity 3 1
Increase in loans receivable, net (23,223) (28,512)
Additions to premises and equipment (224) (279)
Proceeds from the disposition of premises and
equipment 175 5
Proceeds from sale of OREO - - 33
---------------------
Net cash used in investing activities (4,331) (16,931)
Cash flow from financing activities
Increase (decrease) in deposits, net (5,488) 3,188
Proceeds from FHLB advances - long term 25,000 30,000
Repayment of FHLB advances - long term (15,017) (15)
Decrease in FHLB advances - short term (3,300) (14,300)
Increase in repurchase agreements 16 375
Proceeds from exercise of stock options - - 290
ESOP tax effect 62 95
Stock option excess tax benefit - - 150
Repurchase of common stock (703) (4,176)
Payment of dividends (693) (678)
---------------------
Net cash provided (used in) by financing activities (123) 14,929
Net increase in cash equivalents 148 2,377
Cash equivalents
Beginning of period 16,670 22,789
---------------------
End of period $ 16,818 $ 25,166
---------------------
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, 2007 and 2006
In thousands
(unaudited)
Three Months Ended December 31,
2007 2006
---------------------
Supplemental disclosure of cash flow information
Income taxes paid $ - - $ 833
Interest paid 4,414 3,444
Supplemental disclosure of non-cash investing
activities
Change in unrealized holding gain on securities
held for sale, net of tax $ 64 $ 127
Loans transferred to OREO and other repossessed
assets - - 2
Supplemental disclosure of non-cash financing
activities
Shares issued to MRDP $ 210 $ 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, 2007 and 2006
In thousands
(unaudited)
Three Months Ended December 31,
2007 2006
---------------------
Comprehensive income:
Net income $1,615 $1,954
Unrealized holding gain on securities
available for sale, net of tax 64 127
-------------------
Total comprehensive income $1,679 $2,081
===================
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,
2007 ("2007 Form 10-K"). The results of operations for the three months ended
December 31, 2007 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
(b) Stock Split: On June 5, 2007 the Company's common stock was split
two-for-one in the form of a 100% stock dividend. Each shareholder of record
as of May 22, 2007 received one additional share for every share owned. All
share and per share amounts (including stock options) in the condensed
consolidated financial statements and accompanying notes were restated to
reflect the split, except as otherwise noted.
(c) Principles of Consolidation: The interim condensed consolidated financial
statements include the accounts of the Company 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.
(d) Operating Segment: The Company provides a broad range of financial
services to individuals and companies located primarily in western Washington.
These services include demand, time and savings deposits; real estate,
business and consumer lending; and investment advisory services. While the
Company's chief decision maker monitors the revenue streams from the various
products and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the Company's
operations are considered by management to be one reportable operating
segment.
(e) 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.
(f) Certain prior period amounts have been reclassified to conform to the
December 31, 2007 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
9
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, 2007 and 2006, there were 405,562 and 440,830 ESOP
shares, respectively, that had not been allocated.
The following table is in thousands, except for share and per share data:
Three Months Ended December 31,
2007 2006
---------- ----------
Basic EPS computation
Numerator - net income $ 1,615 $ 1,954
Denominator - weighted average
common shares outstanding 6,515,428 7,007,766
---------- ----------
Basic EPS $ 0.25 $ 0.28
Diluted EPS computation
Numerator - net income $ 1,615 $ 1,954
Denominator - weighted average
common shares outstanding 6,515,428 7,007,766
Effect of dilutive stock options 159,345 236,998
Effect of dilutive MRDP shares - - 1,452
---------- ----------
Weighted average common shares
and common stock equivalents 6,674,773 7,246,216
---------- ----------
Diluted EPS $ 0.24 $ 0.27
(3) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Statement
of Financial Accounting Standards ("SFAS" or "Statement") No. 123(R), Share
Based Payment, 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 1,622,500 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 generally 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
10
$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, 2007, options for
279,416 shares are available for future grant under these plans.
Following is activity under the plans:
Three Months Ended
December 31, 2007
Total Options Outstanding
-------------------------
Weighted
Weighted Average
Average Grant Date
Exercise Fair
Shares Price Value
-------- -------- ----------
Options outstanding, beginning of period 412,674 $ 7.39 $1.87
Exercised -- -- --
Forfeited -- -- --
Granted -- --
-------
Options outstanding, end of period 412,674 $ 7.39 $1.87
Options exercisable, end of period 393,670 $ 7.30 $1.85
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 524,144 $ 7.26 $1.85
Exercised (48,300) 6.01 1.63
Granted -- -- --
-------
Options outstanding, end of period 475,844 $ 7.38 $1.87
Options exercisable, end of period 431,836 $ 7.23 $1.84
The aggregate intrinsic value of all options outstanding at December 31, 2007
was $1.98 million. The aggregate intrinsic value of all options that were
exercisable at December 31, 2007 was $1.92 million. 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.
11
At December 31, 2007 there were 19,004 unvested options, all of which are
assumed to vest, with an aggregate intrinsic value of $54,000. There were no
options that vested during the three months ended December 31, 2007. The
total grant date fair value of options vested during the three months ended
December 31, 2006 was $2,000.
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Three Months Ended
December 31,
------------
(In thousands)
2007 2006
---- ----
Proceeds from options exercised $ -- $ 290
Related tax benefit recognized -- 219
Intrinsic value of options exercised -- 562
Options outstanding at December 31, 2007 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)
------------ ------ ------- ----------- ------ ------- -----------
$ 6.00-6.19 233,810 $ 6.00 1.0 233,810 $ 6.00 1.0
6.80-7.45 66,638 7.35 2.9 66,638 7.35 2.9
7.60-7.98 6,000 7.91 4.4 4,000 7.85 4.4
9.53 56,680 9.52 5.2 39,676 9.52 5.2
11.46-11.63 49,546 11.51 6.0 49,546 11.51 6.0
------- -------
412,674 $ 7.39 2.6 393,670 $ 7.30 2.4
There were no options granted during the three months ended December 31, 2007
and December 31, 2006.
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 529,000 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, 2007, the Company awarded 14,315 MRDP shares
to officers and directors. These shares had a weighted average grant date
fair value of $14.69 per share. During the three months ended December 31,
2006 the Company awarded 3,080 shares to directors. These shares had a
weighted average grant date fair value of $18.24 per share.
12
At December 31, 2007, there were a total of 38,379 unvested MRDP shares with
an aggregated grant date fair value of $618,000. There were 616 MRDP shares
that vested during the three months ended December 31, 2007 with an aggregated
grant date fair value of $11,000. There were no MRDP shares that vested
during the three months ended December 31, 2006. At December 31, 2007, there
were 77,751 shares available for future award under the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Three Months Ended December 31,
2007 2006
---------------------------
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in
income $ 1 $ 34 $ 7 $ 11
Related tax benefit recognized -- 12 2 4
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 2008 $ 4 $100 $104
2009 2 134 136
2010 1 134 135
2011 -- 127 127
2012 -- 74 74
2013 -- 3 3
---- ---- ----
Total $ 7 $572 $579
(5) INCOME TAXES
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement 109, Accounting for
Income Taxes. FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company adopted the provisions
of FIN 48 on October 1, 2007 and it did not have a material impact on the
Company's consolidated financial statements. As of December 31, 2007, the
Company had an insignificant amount of unrecognized tax benefits.
The Company and its subsidiary file income tax returns in the U.S. federal
jurisdiction. The Company is no longer subject to U.S. federal examination by
tax authorities for tax years before 2003. The Company's policy is to
recognize interest and penalties accrued related to unrecognized tax benefits
in income tax expense. The amount of interest and penalties accrued for the
three months ended December 31, 2007 was immaterial.
13
(6) DIVIDEND / SUBSEQUENT EVENT
On January 22, 2008, the Company announced a quarterly cash dividend of $0.11
per common share, payable February 22, 2008, to shareholders of record as of
the close of business on February 8, 2008.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 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. SFAS No. 157 also emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and sets out a fair value hierarchy with the highest priority being quoted
prices in active markets. Under SFAS No. 157, fair value measurements are
disclosed by level within that hierarchy. This Statement is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of adoption of SFAS 157 on the Company's consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115. This Statement permits companies to elect to follow fair
value accounting for certain financial assets and liabilities in an effort to
mitigate volatility in earnings without having to apply complex hedge
accounting provisions. The standard also establishes presentation and
disclosure requirements designed to facilitate comparison between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The adoption of this Statement is not expected to have a
material impact on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three months
ended December 31, 2007. 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 areas; 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 2007 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., 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
13,225,000 shares of common stock by the Company. At December 31, 2007, the
Company had total assets of $646.59 million and total shareholders' equity of
$74.99 million. The Company's business activities generally are limited to
passive
14
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. The
Bank has been a member of the Federal Home Loan Bank 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 amount 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 appropriate allowance for loan loss level is
estimated based upon factors and trends identified by management at the time
consolidated financial statements are prepared.
While the Company believes it has established its existing allowance for loan
losses in accordance with accounting principles generally accepted in the
United States, there can be no assurance that regulators, in reviewing the
Company's loan portfolio, will not request the Company to significantly
increase or decrease its allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed
elsewhere in this document. Although management believes the levels of the
allowance as of both December 31, 2007 and September 30, 2007 were adequate to
absorb probable losses inherent in the loan portfolio, a decline in local
economic conditions, or other factors, could result in a material increase in
the allowance for loan losses and may adversely affect the Company's financial
condition and results of operations.
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
15
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, 2007 and September 30, 2007
The Company's total assets increased by $1.75 million, or 0.3%, to $646.59
million at December 31, 2007 from $644.85 million at September 30, 2007,
primarily attributable to a $21.31 million, or 4.1%, increase in net loans
receivable. This increase was partially offset by an $18.87 million decrease
in investment and mortgage-backed securities.
Total deposits decreased by $5.49 million, or 1.2%, to $461.25 million at
December 31, 2007 from $466.74 million at September 30, 2007 primarily
attributable to a decrease in non-interest bearing account balances, savings
account balances and certificate of deposit account balances. These decreases
were partially offset by an increase in N.O.W. checking account balances.
Shareholders' equity increased by $442,000, or 0.6%, to $74.99 million at
December 31, 2007 from $74.55 million at September 30, 2007. The increase in
shareholders' equity was primarily a result of retained net income, which was
partially offset by share repurchases and cash dividends.
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash Equivalents: Cash equivalents increased by $148,000, or 0.9%, to $16.82
million at December 31, 2007 from $16.67 million at September 30, 2007. The
increase was primarily a result of an increase in non-interest bearing
accounts, which were partially offset by a decrease in federal funds sold and
interest bearing deposits in banks.
Investment Securities and Mortgage-backed Securities: Investment and
mortgage-backed securities decreased by $18.87 million, or 29.5%, to $45.10
million at December 31, 2007 from $63.97 million at September 30, 2007, as a
result of the maturity or call of U.S. agency securities and regular
amortization and prepayments on mortgage-backed securities. At December 31,
2007, the Company's securities' portfolio was comprised of mutual funds of
$31.85 million, U.S. agency securities of $1.0 million, and mortgage-backed
securities of $12.19 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 $21.31 million, or 4.1%, to $536.65
million at December 31, 2007 from $515.34 million at September 30, 2007. The
increase in the portfolio was primarily a result of a $24.81 million increase
in construction loans (net of undisbursed portion of construction loans in
process) and a $3.67 million increase in multi-family loans. These increases
were partially offset by a $3.67 million decrease in land loans and a $1.86
million decrease in commercial real estate loans.
16
Loan originations decreased to $65.51 million for the three months ended
December 31, 2007 compared to $80.76 million for the three months ended
December 31, 2006. 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 $7.41 million for the three months
ended December 31, 2007 compared to $7.24 million for the three months ended
December 31, 2006.
For additional information, see the sections entitled "Loan Portfolio
Composition" and "Construction and Land Development Loan Portfolio
Composition" included herein.
Premises and Equipment: Premises and equipment decreased to $16.51 million at
December 31, 2007 from $16.58 million at September 30, 2007, primarily as a
result of depreciation recorded on depreciable assets.
Goodwill and Core Deposit Intangible: The value of goodwill remained
unchanged. The amortized value of core deposit intangible decreased to $1.16
million at December 31, 2007 from $1.22 million at September 30, 2007. The
decrease is attributable to scheduled amortization of the core deposit
intangible.
Deposits: Deposits decreased by $5.49 million, or 1.2%, to $461.25 million at
December 31, 2007 from $466.74 million at September 30, 2007. The decrease
was primarily a result of a $4.37 million decrease in non-interest bearing
accounts, a $1.70 million decrease in certificate of deposit accounts and a
$1.67 million decrease in savings accounts. These decreases were partially
offset by an increase of $3.22 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 $6.70 million to $106.99 million at December 31, 2007 from
$100.29 million at September 30, 2007 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 increased by $442,000 to
$74.99 million at December 31, 2007 from $74.55 million at September 30, 2007,
primarily as a result of net income of $1.62 million. The increase from net
income was partially offset by share repurchases of $703,000 and cash
dividends to shareholders of $693,000.
During the three months ended December 31, 2007 the Company repurchased 50,000
shares of its common stock for $703,000, an average price of $14.06 per share.
Cumulatively, the Company has repurchased 7,688,984 shares (58.1%) of the
13,225,000 shares that were issued in its 1998 initial public offering, at an
average price of $8.93 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 0.60% at
December 31, 2007 compared to 0.23% at September 30, 2007, as total
non-performing assets increased to $3.91 million at December 31, 2007 from
$1.49 million at September 30, 2007.
Total non-performing assets of $3.91 million at December 31, 2007 were
comprised of 15 loans including eight single family speculative home loans
totaling $3.19 million, two home equity consumer loans totaling $293,000,
three land loans totaling $212,000, one commercial business loan for $120,000
and one commercial real estate loan for $90,000. The Company had no
charge-offs during the three months ended December 31, 2007. For additional
information, see the section entitled "Non-performing Assets" and "Activity in
the Allowance for Loan Losses" included herein.
Investment Securities
---------------------
The following table sets forth the composition of the Company's investment
securities portfolio.
17
At December 31, At September 30,
2007 2007
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Held-to-maturity:
Mortgage-backed securities $ 67 0.2% $ 71 0.1%
Available-for-sale (at fair value)
U.S. agency securities 999 2.2 18,975 29.7
Mortgage-backed securities 12,186 27.0 13,048 20.4
Mutual funds 31,852 70.6 31,875 49.8
------- ----- ------- -----
Total portfolio $45,104 100.0% $63,969 100.0%
======= ===== ======= =====
Loan Portfolio Composition
--------------------------
The following table sets forth the composition of the Company's loan
portfolio.
At December 31, At September 30,
2007 2007
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Mortgage loans:
One- to four-family (1) $101,971 16.8% $102,434 17.4%
Multi-family 38,828 6.4 35,157 6.0
Commercial 126,003 20.8 127,866 21.7
Construction and
land development 206,105 34.0 186,261 31.6
Land 57,033 9.4 60,706 10.3
-------- ----- -------- -----
Total mortgage loans 529,940 87.4 512,424 87.0
Consumer loans:
Home equity and second
mortgage 47,071 7.8 47,269 8.0
Other 10,627 1.7 10,922 1.9
-------- ----- -------- -----
57,698 9.5 58,191 9.9
Commercial business loans 18,642 3.1 18,164 3.1
-------- ----- -------- -----
Total loans 606,280 100.0% 588,779 100.0%
===== =====
Less:
Undisbursed portion of
construction loans in
process (60,708) (65,673)
Deferred loan origination fees (2,928) (2,968)
Allowance for loan losses (5,997) (4,797)
-------- --------
Total loans receivable, net $536,647 $515,341
======== ========
---------------
(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,
2007 2007
Amount Percent Amount Percent
------------------- -------------------
(Dollars in thousands)
Custom and owner/builder const. $ 50,748 24.6% $ 52,375 28.1%
Speculative construction 41,251 20.0 43,012 23.1
Commercial real estate 66,949 32.5 50,518 27.1
Multi-family 22,060 10.7 18,064 9.7
Land development 25,097 12.2 22,292 12.0
-------- ----- -------- -----
Total construction loans $206,105 100.0% $186,261 100.0%
======== ===== ======== =====
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,
2007 2006
-------------------
(In thousands)
Balance at beginning of period $4,797 $4,122
Provision for loan losses 1,200 - -
Loans charged off -- (1)
Recoveries on loans previously charged off -- - -
------ ------
Net charge-off -- (1)
------ ------
Balance at end of period $5,997 $4,121
====== ======
19
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets.
At At
December 31, September 30,
2007 2007
------------------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ - - $ 252
Commercial real estate 90 90
Construction and land development 3,193 1,000
Land 212 28
Consumer loans 293 - -
Commercial business loans 120 120
-------- --------
Total 3,908 1,490
Accruing loans which are contractually
past due 90 days or more: - - - -
-------- --------
Total - - - -
Total of non-accrual and
90 days past due loans 3,908 1,490
OREO and other
repossessed items - - - -
-------- --------
Total non-performing assets $ 3,908 $ 1,490
======== ========
Restructured loans 2,462 - -
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 0.72% 0.29%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 0.60% 0.23%
Non-performing assets as a percentage
of total assets 0.60% 0.23%
Loans receivable (1) $542,644 $520,138
======== ========
Total assets $646,594 $644,848
======== ========
------------
(1) Includes loans held-for-sale and is before the allowance for loan losses.
Deposit Breakdown
-----------------
The following table sets forth the composition of the Company's deposit
balances.
At At
December 31, 2007 September 30, 2007
----------------- ------------------
(In thousands)
Non-interest bearing $ 50,590 $ 54,962
N.O.W. checking 83,594 80,372
Savings 54,738 56,412
Money market accounts 47,102 48,068
Certificates of deposit under $100 133,676 159,605
Certificates of deposit $100 and over 68,527 67,316
Certificates of deposit - brokered 23,020 --
-------- --------
Total deposits $461,247 $466,735
======== ========
20
FHLB Advance Maturity Schedule
------------------------------
The Bank has short- and long-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,
2007 2007
Amount Percent Amount Percent
------------------ ------------------
(Dollars in thousands)
Short-term $ 26,700 25.1% $30,000 30.1%
Long-term 79,680 74.9 69,697 69.9
-------- ----- ------- -----
Total FHLB advances $106,380 100.0% $99,697 100.0%
======== ===== ======= =====
The Bank's FHLB borrowings mature at various dates through September 2017 and
bear interest at rates ranging from 3.69% to 5.54%. The weighted average
interest rate on FHLB borrowings at December 31, 2007 was 4.37%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
Remainder of 2008 $ 26,753
2009 4,627
2010 15,000
2011 10,000
2012 - -
Thereafter 50,000
--------
Total $106,380
========
A portion of these advances have a putable feature and may be called by the
FHLB earlier than the above schedule indicates.
Comparison of Operating Results for the Three Months Ended December 31, 2007
and 2006
The Company's net income decreased by $339,000, or 17.3%, to $1.62 million for
the quarter ended December 31, 2007 from $1.95 million for the quarter ended
December 31, 2006. Diluted earnings per share decreased 11.1% to $0.24 for
the quarter ended December 31, 2007 from $0.27 for the quarter ended December
31, 2006.
The decrease in diluted earnings per share was primarily a result of a $1.20
million increase in the provision for loan losses during the quarter ended
December 31, 2007 compared to the quarter ended December 31, 2006. The
increased provision was primarily a result of an increase in the level of
non-performing loans, the reclassification of certain loans, continued loan
portfolio growth, and a weakening in the housing market in certain market
areas. The decrease in earnings per share attributable to the increased
provision for loan losses was partially offset by increased net interest
income and a decrease in the weighted average number of shares outstanding as
a result of share repurchases.
A more detailed explanation of the income statement categories is presented
below.
Net Income: Net income for the quarter ended December 31, 2007 decreased by
$339,000, or 17.3%, to $1.62 million from $1.95 million for the quarter ended
December 31, 2006. Earnings per diluted share for the quarter ended December
31, 2007 decreased to $0.24 from $0.27 for the quarter ended December 31,
2006. The $0.03 decrease in diluted earnings per share for the quarter ended
December 31, 2007 was primarily a result of a $1.20 million ($780,000 net of
income tax - $0.11 per diluted share) increase in the provision for loan
losses. This decrease in earnings per share was partially offset by a
$643,000 ($418,000 net of income tax - $0.06 per diluted share) increase in
net interest income and a decrease in the number of weighted average shares
outstanding ($0.02 per diluted share) primarily as a result of share
repurchases.
21
Net Interest Income: Net interest income increased by $643,000, or 10.2%, to
$6.92 million for the quarter ended December 31, 2007 from $6.28 million for
the quarter ended December 31, 2006, primarily as a result of a larger
interest earning asset base. Total interest and dividend income increased by
$1.71 million, or 17.5%, to $11.48 million for the quarter ended December 31,
2007 from $9.76 million for the quarter ended December 31, 2006 as average
total interest earning assets increased by $73.06 million. The yield on
interest earning assets increased to 7.62% for the quarter ended December 31,
2007 from 7.38% for the quarter ended December 31, 2006. Total interest
expense increased by $1.07 million, or 30.7%, to $4.56 million for the quarter
ended December 31, 2007 from $3.49 million for the quarter ended December 31,
2006 as average total interest bearing liabilities increased by $76.37
million. The average rate paid on interest bearing liabilities increased to
3.49% for the quarter ended December 31, 2007 from 3.13% for the quarter ended
December 31, 2006. The net interest margin decreased to 4.59% for the quarter
ended December 31, 2007 from 4.74% for the quarter ended December 31, 2006.
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 wholesale sources (FHLB advances and
brokered deposits) to fund loan growth. For additional information, see the
section entitled "Rate Volume Analysis" included herein.
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, 2007
compared to three months
ended December 31, 2006
increase (decrease)
due to
------
Rate Volume Net Change
---- ------ ----------
(In thousands)
Interest-earning assets:
Loans receivable (1) ($1) $1,979 $1,978
Investments and
mortgage-backed
securities 29 (235) (206)
FHLB stock and
equity securities - - 3 3
Federal funds sold (9) (25) (34)
Interest-bearing
deposits (5) (23) (28)
----- ------ ------
Total net increase in
income on interest-
earning assets 14 1,699 1,713
Interest-bearing liabilities:
Savings accounts - - (10) (10)
NOW accounts 15 (6) 9
Money market
Accounts 68 30 98
Certificate accounts 190 458 648
Short-term borrowings (46) 146 100
Long-term borrowings (110) 335 225
----- ------ ------
Total net increase
in expense on interest
bearing liabilities 117 953 1,070
Net increase (decrease) in
net interest income ($103) $ 746 $ 643
(1) Includes loans originated for sale.
22
Provision for Loan Losses: A provision for loan losses of $1.20 million was
made during the quarter ended December 31, 2007 compared to no provision made
during the quarter ended December 31, 2006. The provision was made primarily
as a result of an increase in non-performing loans, an increase in the level
of loans classified as substandard and special mention under the Bank's loan
grading system, and loan portfolio growth in higher risk loan categories such
as construction loans.
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 amount 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 $6.00 million at December 31, 2007
(1.11% of loans receivable and 153% 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 (0.91% of loans receivable and 1,724% of non-performing loans) at
December 31, 2006. The Company had no charge-offs during the quarter ended
December 31, 2007 and a net charge-off of $1,000 for the quarter ended
December 31, 2006.
Non-performing loans increased by $2.42 million to $3.91 million during the
quarter ended December 31, 2007 primarily as a result of two speculative
construction builders becoming delinquent on their loans from the Bank. One
builder has six single-family home construction loans ($343,000 average per
loan) in Pierce County that became 90 days delinquent during the quarter,
while the other builder had one single-family home construction loan
($521,000) in Pierce County that also become 90 days delinquent during the
quarter.
Management also downgraded additional loans to its special mention and
substandard loan grade classifications during the quarter ended December 31,
2007. Under the Bank's Classification of Assets Policy, special mention loans
are defined as those credits deemed by management to have some potential
weakness that deserve management's close attention. If left uncorrected these
potential weaknesses may result in the deterioration of the payment prospects
of the loan. Substandard loans have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. Under the Bank's allowance for loan
loss methodology loans classified as special mention or substandard are
assumed to have more risk and therefore have higher loss factors associated
with them. A majority of the loans downgraded during the quarter ended
December 31, 2007 were to borrowers involved in construction and land
development activities. As a result of a slowdown in the sales of one- to
four-family homes and other uncertain
23
economic conditions, management believes that certain speculative construction
and land development loans have assumed a higher risk profile and were
therefore downgraded during the quarter. During the quarter the Bank also
restructured $2.46 million in loans to a speculative construction borrower by
reducing the interest rates on the loans for a 90 day period.
For additional information, see the section entitled "Activity in the
Allowance for Loan Losses" included herein.
Non-interest Income: Total non-interest income increased by $16,000, or 1.1%,
to $1.50 million for the quarter ended December 31, 2007 from $1.48 million
for the quarter ended December 31, 2006, primarily as a result of an increase
in ATM transaction fees and an increase in fee income from the sale of
non-deposit investment products. These increases were partially offset by a
decrease in income from loan sales, a decrease in servicing income on loans
sold, and a decrease in service charges on deposits.
Non-interest Expense: Total non-interest expense decreased by $46,000, or
0.9%, to $4.85 million for the quarter ended December 31, 2007 from $4.90
million for the quarter ended December 31, 2006. The decrease was primarily
attributable to a $160,000 decrease in premises and equipment expense and a
$30,000 decrease in professional fees. The decrease in premises and equipment
expense was primarily attributable to an insurance settlement for damage to
the Bank's previous data center facility that reduced expenses by $172,000
during the quarter. This decrease was partially offset by a $135,000 increase
to salaries and employee benefit expense. The increased salary and benefit
expense was attributable to annual salary adjustments (effective October 1,
2007) and the addition of several employees. The Company's efficiency ratio
improved to 57.64% (or 59.68% if the $172,000 insurance settlement was
removed) for the quarter ended December 31, 2007 from 63.13% for the quarter
ended December 31, 2006.
Provision for Income Taxes: The provision for income taxes decreased to
$750,000 for the quarter ended December 31, 2007 from $906,000 for the quarter
ended December 31, 2006 primarily as a result of lower income before taxes.
The Company's effective tax rate was 31.71% for the quarter ended December 31,
2007 and 31.68% for the quarter ended December 31, 2006.
Liquidity and Capital Resources
-------------------------------
The Company's primary sources of funds are customer deposits, brokered
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, 2007. 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 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 0.9% to $16.82 million at
December 31, 2007 from $16.67 million at September 30, 2007. The increase in
liquid assets were primarily reflected in an increase in non-interest bearing
cash equivalents and were partially offset by a decrease in federal funds sold
and other interest bearing deposits in banks.
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
24
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
2007, 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 9.20%. The Bank maintained an uncommitted credit facility with the FHLB
of Seattle that provided for immediately available advances up to an aggregate
amount equal to 30% of total assets, limited by available collateral, under
which $106.38 million was outstanding at December 31, 2007. The Bank also has
a $10.00 million overnight credit line with Pacific Coast Banker's Bank. At
December 31, 2007, the Bank did not have any outstanding advances on this
credit 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, 2007, the Bank had loan commitments totaling $41.91 million
and undisbursed loans in process totaling $60.71 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, 2007 totaled $207.00 million. Historically,
the Bank has been able to retain a significant amount of its non-brokered
certificates of deposit as they mature. At December 31, 2007, the Bank had
$23.02 million in brokered certificate of deposit accounts, all of which are
scheduled to mature in less than one year. As these brokered certificate of
deposit accounts approach maturity, the Bank will evaluate its liquidity needs
and the cost of other alternative funding sources before determining if
additional brokered deposits will be acquired to replace the maturing brokered
deposits.
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, 2007, 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,
2007 to its minimum regulatory capital requirements at that date (Dollars in
thousands):
Percent of
Amount Adjusted Total Assets (1)
------ ------------------------
Tier 1 (leverage) capital $59,799 9.32%
Tier 1 (leverage) capital requirement 25,664 4.00
------- -----
Excess $34,135 5.32%
======= =====
Tier 1 risk adjusted capital $59,799 10.93%
Tier 1 risk adjusted capital requirement 21,890 4.00
------- -----
Excess $37,909 6.93%
======= =====
Total risk based capital $65,796 12.02%
Total risk based capital requirement 43,780 8.00
------- -----
Excess $22,016 4.02%
======= =====
-----------------
(1) For the Tier 1 (leverage) capital, percent of total average assets
calculation, total average of assets were $641.60 million. For the Tier 1
risk-based capital and total risk-based capital calculations, total
risk-weighted assets were $547.26 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,
2007 2007 2006
-------------------------------------------
PERFORMANCE RATIOS:
Return on average assets (1) 0.99% 1.36% 1.35%
Return on average equity (1) 8.61% 11.66% 9.94%
Net interest margin (1) 4.59% 4.60% 4.74%
Efficiency ratio 57.64% 58.47% 63.13%
At At At
December 31, September 30, December 31,
2007 2007 2006
-------------------------------------------
ASSET QUALITY RATIOS:
Non-performing loans $3,908 $1,490 $ 239
OREO & other repossessed assets - - -- 2
------ ------ ------
Total non-performing assets $3,908 $1,490 $ 241
Non-performing assets to total
assets 0.60% 0.23% 0.04%
Allowance for loan losses to
non-performing loans 153% 322% 1,724%
Restructured loans $2,462 - - - -
Book value per share (2) $10.84 $10.72 $10.53
Book value per share (3) $11.50 $11.39 $11.19
Tangible book value per
share (2) (4) $ 9.86 $ 9.73 $ 9.56
Tangible book value per
share (3) (4) $10.46 $10.34 $10.16
------------------
(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
For the Three Months Ended
December 31, September 30, December 31,
2007 2007 2006
-------------------------------------------
AVERAGE BALANCE SHEET:
----------------------
Average total loans $538,284 $509,166 $439,294
Average total interest earning
assets 602,628 586,056 529,572
Average total assets 650,893 634,762 580,114
Average total interest bearing
deposits 411,766 405,078 376,365
Average FHLB advances & other
borrowings 106,937 96,442 65,970
Average shareholders' equity 75,002 73,916 78,646
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, 2007.
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, 2007 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, 2007, 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 2007 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 ended December 31, 2007:
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) the Plan(1)
----------------------- --------- ---------- ----------- ---------------
10/01/2007 -
10/31/2007 - - - - - - 144,950
11/01/2007 -
11/30/2007 - - - - - - 144,950
12/01/2007 -
12/31/2007 50,000 14.06 50,000 94,950
Total 50,000 $14.06 50,000 94,950
(1) On May 25, 2007, the Company announced a share repurchase plan
authorizing the repurchase of up to 5% of its outstanding shares, or 356,950
shares. As of December 31, 2007, a total of 262,000 shares had been
repurchased at an average price of $16.90 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)
3.2 Bylaws of the Registrant (1)
3.3 Amendment to Bylaws (2)
10.1 Employee Severance Compensation Plan, as revised (3)
29
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)
10.9 Employment Agreement between the Company and the Bank and
Michael R. Sand (7)
10.10 Employment Agreement between the Company and the Bank and Dean
J. Brydon (7)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes Oxley Act
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes Oxley Act
---------------
(1) Incorporated by reference to the Registrant's Registration
Statement 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; and to the
Registrant's Current Report on Form 8-K dated April 13, 2007,
and to the Registrant's Current Report on Form 8-K dated
December 18, 2007.
(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.
(7) Incorporated by reference to the Registrant's Current Report on
Form 8-K dated April 13, 2007.
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 6, 2008 By: /s/ Michael R. Sand
-------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: February 6, 2008 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 6, 2008
/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 6, 2008
/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
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350), each of the undersigned hereby certifies in his capacity as an
officer of Timberland Bancorp, Inc. (the "Company") and in connection with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2007 ("Report"), 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 financial condition and results of operations
of the Company as of the dates and for the periods presented in the
financial statements included in the Report.
/s/ Michael R. Sand /s/ Dean J. Brydon
---------------------------------- ------------------------------
Michael R. Sand Dean J. Brydon
Chief Executive Officer Chief Financial Officer
Date: February 6, 2008
35