UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
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, a non-accelerated filer, or a small reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer ___ Accelerated Filer X Non-accelerated filer ___
Smaller reporting company ___ ---
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 JULY 31, 2008
----- ------------------------------------
Common stock, $.01 par value 6,901,453
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 9-20
Item 2. Management's Discussion and Analysis of Financial Condition 20-33
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 1A Risk Factors 35-38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38-39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits 39-40
SIGNATURES 41
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
2
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2008 and September 30, 2007
Dollars in thousands, except share amounts
June 30, September 30,
2008 2007
-------------------
Assets (Unaudited)
Cash equivalents:
Non-interest bearing $ 14,776 $ 10,813
Interest bearing deposits in banks 3,196 2,082
Federal funds sold 5,565 3,775
---------------------
23,537 16,670
---------------------
Investments and mortgage-backed securities: held
to maturity 14,684 71
Investments and mortgage-backed securities:
available for sale 18,828 63,898
Federal Home Loan Bank ("FHLB") stock 5,705 5,705
Loans receivable 562,664 519,381
Loans held for sale 1,065 757
Less: Allowance for loan losses (7,076) (4,797)
---------------------
Net loans receivable 556,653 515,341
---------------------
Accrued interest receivable 2,932 3,424
Premises and equipment 16,286 16,575
Other real estate owned ("OREO") and other
repossessed items 879 --
Bank owned life insurance ("BOLI") 12,775 12,415
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 1,034 1,221
Mortgage servicing rights 1,277 1,051
Other assets 3,514 2,827
---------------------
Total assets $ 663,754 $ 644,848
=====================
Liabilities and shareholders' equity
Deposits $ 479,934 $ 466,735
FHLB advances 104,645 99,697
Other borrowings: repurchase agreements 1,007 595
Other liabilities and accrued expenses 3,393 3,274
---------------------
Total liabilities 588,979 570,301
---------------------
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;
June 30, 2008 6,901,453 shares issued and outstanding
September 30, 2007 6,953,360 shares issued and
outstanding 69 70
Additional paid in capital 8,706 9,923
Unearned shares-Employee Stock Ownership Plan("ESOP") (2,842) (3,040)
Retained earnings 68,822 68,378
Accumulated other comprehensive income (loss) 20 (784)
---------------------
Total shareholders' equity 74,775 74,547
---------------------
Total liabilities and shareholders' equity $ 663,754 $ 644,848
=====================
See notes to unaudited condensed consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended June 30, 2008 and 2007
Dollars in thousands, except per share amounts
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
Interest and dividend income 2008 2007 2008 2007
------------------- ----------------
Loans receivable $ 9,825 $ 9,981 $30,947 $28,050
Investments and mortgage-backed
securities 235 350 625 1,185
Dividends from mutual funds and
FHLB stock 272 426 1,090 1,259
Federal funds sold 28 49 87 192
Interest bearing deposits in banks 8 8 22 61
------------------- ----------------
Total interest and dividend income 10,368 10,814 32,771 30,747
------------------- ----------------
Interest expense
Deposits 2,703 2,866 9,153 8,113
FHLB advances -- short term 57 651 591 1,298
FHLB advances -- long term 1,104 627 2,919 1,875
Other borrowings 4 12 18 39
------------------- ----------------
Total interest expense 3,868 4,156 12,681 11,325
------------------- ----------------
Net interest income 6,500 6,658 20,090 19,422
Provision for loan losses 500 260 2,400 416
Net interest income after provision ------------------- ----------------
for loan losses 6,000 6,398 17,690 19,006
Non-interest income ------------------- ----------------
Service charges on deposits 948 692 2,292 2,061
Gain on sale of loans, net 127 79 364 250
Loss on redemption of mutual funds (2,822) -- (2,822) --
BOLI net earnings 121 116 360 343
Servicing income on loans sold 234 127 531 373
ATM transaction fees 329 295 930 830
Fee income from non-deposit investment
sales 31 37 87 98
Other 139 155 417 450
------------------- ----------------
Total non-interest income (loss) (893) 1,501 2,159 4,405
Non-interest expense ------------------- ----------------
Salaries and employee benefits 2,812 2,752 8,718 8,303
Premises and equipment 519 557 1,634 1,827
Advertising 228 190 678 569
Loss (gain) from real estate operations -- 1 -- (14)
ATM expenses 136 128 426 354
Postage and courier 129 113 376 347
Amortization of CDI 62 71 186 214
State and local taxes 149 148 447 420
Professional fees 175 175 467 524
Other 709 626 2,044 2,052
------------------- ----------------
Total non-interest expense 4,919 4,761 14,976 14,596
------------------- ----------------
Income before federal income taxes 188 3,138 4,873 8,815
Federal income taxes 734 1,000 2,218 2,806
------------------- ----------------
Net income (loss) $ (546) $ 2,138 $ 2,655 $ 6,009
Earnings (loss) per common share: =================== ================
Basic $ (0.08) $ 0.32 $ 0.41 $ 0.88
Diluted $ (0.08) $ 0.31 $ 0.40 $ 0.85
Weighted average shares outstanding:
Basic 6,446,303 6,713,777 6,467,874 6,863,253
Diluted 6,524,818 6,910,165 6,587,120 7,080,530
Dividends paid per share: $ 0.11 $ 0.09 $ 0.32 $ 0.27
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 nine months ended June 30, 2008
Dollars in thousands, except per share amounts and common stock shares
Accumulated
Other
Unearned Compre-
Common Common Additional Shares hensive
Stock Shares Stock Paid-In Issued to Retained Income
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 -- -- -- -- 2,655 -- 2,655
Issuance of MRDP shares 20,315 -- -- -- -- -- --
Repurchase of
common stock (144,950) (2) (1,920) -- -- -- (1,922)
Exercise of stock options 72,728 1 459 -- -- -- 460
Cash dividends
($0.32 per share) -- -- -- -- (2,211) -- (2,211)
Earned ESOP shares -- -- 132 198 -- -- 330
MRDP compensation expense -- -- 109 -- - -- 109
Stock option compensation exp. -- -- 3 -- -- - 3
Unrealized holding gain (loss) on
securities available
for sale, net of tax -- -- -- - -- 804 804
Balance, June 30, 2008 6,901,453 $69 $8,706 ($2,842) $68,822 $20 $74,775
(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 nine months ended June 30, 2008 and 2007
In thousands (unaudited)
Nine Months Ended June 30,
Cash flow from operating activities 2008 2007
-------------------------
Net income $2,655 $6,009
Non-cash revenues, expenses, gains and losses
included in income:
Provision for loan losses 2,400 416
Depreciation 830 760
Deferred federal income taxes (1,076) (178)
Amortization of CDI 186 214
Earned ESOP shares 198 199
MRDP compensation expense 97 36
Stock option compensation expense 3 19
Stock option tax effect less excess tax benefit 4 110
Gain on sale of OREO, net - (19)
Gain on the disposition of premises and equipment (294) (64)
BOLI cash surrender value increase (360) (343)
Gain on sale of loans (364) (250)
Increase (decrease) in deferred loan origination fees (103) 123
Loss on sale of investment securities 2,822 --
Loans originated for sale (35,253) (20,102)
Proceeds from sale of loans 35,309 21,636
Decrease (increase) in other assets, net 226 (412)
Decrease in other liabilities and accrued expenses, net 119 449
-------------------------
Net cash provided by operating activities 7,399 8,603
Cash flow from investing activities
Decrease in certificates of deposit held for investment -- 100
Proceeds from maturities of securities available for
sale 21,867 16,630
Proceeds from maturities of securities held to maturity 73 2
Proceeds from sale of securities available for sale 6,929 --
Increase in loans receivable, net (44,180) (74,580)
Additions to premises and equipment (621) (847)
Proceeds from the disposition of premises and equipment 374 324
Proceeds from sale of OREO -- 37
-------------------------
Net cash used in investing activities (15,558) (58,334)
Cash flow from financing activities
Increase in deposits, net 13,199 2,453
Proceeds from FHLB advances long term 50,000 30,000
Repayment of FHLB advances long term (15,052) (24,048)
Proceeds from FHLB advances short term (30,000) 43,750
Increase (decrease) in repurchase agreements 412 (172)
Proceeds from exercise of stock options 444 744
ESOP tax effect 132 280
MRDP compensation tax effect 12 --
Stock option excess tax benefit 12 353
Repurchase of common stock (1,922) (11,236)
Payment of dividends (2,211) (1,991)
-------------------------
Net cash provided by financing activities 15,026 40,133
See notes to unaudited condensed consolidated financial statements (continued)
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the nine months ended June 30, 2008 and 2007
In thousands
(unaudited)
Nine Months Ended June 30,
2008 2007
-------------------------
Net (increase) decrease in cash equivalents 6,867 (9,958)
Cash equivalents
Beginning of period 16,670 22,789
-------------------------
End of period $ 23,537 $ 13,191
-------------------------
Supplemental disclosure of cash flow information
Income taxes paid $ 3,288 $2,674
Interest paid 12,834 11,222
Supplemental disclosure of non-cash investing activities
Change in unrealized holding gain (loss) on
securities held for sale, net of tax $ 804 $ 104
Loans transferred to OREO and other repossessed
assets 879 71
Mutual funds redeemed for mortgage-backed
securities 22,188 --
Supplemental disclosure of non-cash financing activities
Shares issued to MRDP $ 259 $ 263
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended June 30, 2008 and 2007
In thousands
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
Comprehensive income: ------------------ -----------------
Net income (loss) $(546) $2,138 $2,655 $6,009
Unrealized holding gain (loss) on
securities available for sale,
net of tax 991 (162) 804 104
------------------ -----------------
Total comprehensive income $ 445 $1,976 $3,459 $6,113
================== =================
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 nine months ended
June 30, 2008 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 June
30, 2008 presentation with no change to net income or shareholders' equity
previously reported.
9
(2) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and mortgage-backed securities have been classified according to
management's intent (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
June 30, 2008
Held to Maturity
Mortgage-backed securities $14,656 $ 1 ($30) $14,627
U.S. agency securities 28 -- (1) 27
Total $14,684 $ 1 ($31) $14,654
Available for Sale
Mortgage-backed securities $17,797 $111 ($14) $17,894
Mutual funds 1,000 -- (66) 934
Total $18,797 $111 ($80) $18,828
September 30, 2007
Held to Maturity
Mortgage-backed securities $ 71 $ -- ($1) $70
Available for Sale
Mortgage-backed securities $13,147 $31 ($131) $13,047
Mutual funds 32,939 - - (1,063) 31,876
U.S. agency securities 19,000 - - (25) 18,975
Total $65,086 $31 ($1,219) $63,898
The fair value of temporarily impaired securities, the amount of unrealized losses and the length of time
these unrealized losses existed as of June 30, 2008 are as follows (in thousands):
Less Than 12 Months 12 Months or Longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
Held to Maturity
U.S. agency securities $ 27 ($1) $ -- $ - $ 27 ($1)
Mortgage-backed securities 13,501 (30) -- - 13,501 (30)
Total 13,528 (31) -- - 13,528 (31)
Available for Sale
Mortgage-backed securities 7,602 (11) 124 (3) 7,726 (14)
Mutual funds -- -- 934 (66) 934 (66)
Total $ 7,602 ($11) $1,058 ($69) $8,660 ($80)
The Company has evaluated these securities and has determined that the decline in their value is temporary.
The unrealized losses are generally due to the unusually large spreads in the market for mortgage-related
products. The fair value of the mortgage-backed securities and the U.S. agency securities is expected to
recover
10
as the securities approach their maturity date and/or as market interest rates
decrease. The fair value of the mutual funds is expected to recover as
spreads narrow on mortgage-related securities. The Company has the ability
and intent to hold the investments until the market value recovers.
Mortgage-backed and agency securities pledged as collateral for public fund
deposits, federal treasury tax and loan deposits, FHLB collateral, retail
repurchase agreements and other non-profit organization deposits totaled
$32,548,000 and $31,869,000 at June 30, 2008 and September 30, 2007,
respectively.
The contractual maturities of debt securities at June 30, 2008 are as follows
(in thousands). Expected maturities may differ from scheduled maturities due
to the prepayment of principal or call provisions.
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------- ------------------
Due within one year $ -- $ -- $ -- $ --
Due after one year to five years 15 15 688 690
Due after five to ten years 75 75 286 290
Due after ten years 14,594 14,565 16,737 16,914
Mutual funds -- -- 1,000 934
Total $14,684 $14,655 $18,711 $18,828
There were gross realized losses on sales of securities available for sale for
the three and nine months ended June 30, 2008 of $2,822,000 and no gross
realized gains or losses for the three and nine months ended June 30, 2007.
(3) LOANS
Loans receivable and loans held for sale consisted of the following (dollars
in thousands):
At June 30, At September 30,
2008 2007
Amount Percent Amount Percent
------------------- -------------------
Mortgage loans:
One- to four-family (1) $ 105,791 17.0% $ 102,434 17.4%
Multi-family 37,465 6.0 35,157 6.0
Commercial 140,785 22.6 127,866 21.7
Construction and land
development 202,029 32.4 186,261 31.6
Land 56,489 9.0 60,706 10.3
Total mortgage loans 542,559 87.0 512,424 87.0
Consumer loans:
Home equity and second mortgage 46,771 7.5 47,269 8.0
Other 11,292 1.8 10,922 1.9
Total consumer loans 58,063 9.3 58,191 9.9
Commercial business loans 23,307 3.7 18,164 3.1
Total loans receivable 623,929 100.0% 588,779 100.0%
Less:
Undisbursed portion of
construction loans in process 57,335 65,673
Deferred loan origination fees 2,865 2,968
Allowance for loan losses 7,076 4,797
67,276 73,438
Total Loans receivable, net $556,653 $515,341
11
-----------------------------------
(1) Includes loans held-for-sale
Construction and Land Development Loan Portfolio Composition
------------------------------------------------------------
The following table sets forth the composition of the Company's construction
and land development loan portfolio.
At June 30, At September 30,
2008 2007
Amount Percent Amount Percent
---------------- ----------------
(Dollars in thousands)
Custom and owner/builder const. $ 48,384 24.0% $ 52,375 28.1%
Speculative construction 36,979 18.3 43,012 23.1
Commercial real estate 66,846 33.1 50,518 27.1
Multi-family 19,044 9.4 18,064 9.7
Land development 30,776 15.2 22,292 12.0
-------- ----- -------- -----
Total construction loans $202,029 100.0% $186,261 100.0%
======== ===== ======== =====
Allowance for Loan Losses
-------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
June 30,
2008 2007
--------------------
(In thousands)
Balance at beginning of period $ 6,697 $ 4,272
Provision for loan losses 500 260
Loans charged off (121) (3)
Recoveries on loans previously charged off -- --
Net charge-offs (121) (3)
Balance at end of period $ 7,076 $ 4,529
Nine Months Ended
June 30,
2008 2007
--------------------
(In thousands)
Balance at beginning of period $ 4,797 $ 4,122
Provision for loan losses 2,400 416
Loans charged off (121) (10)
Recoveries on loans previously charged off -- 1
----- -----
Net charge-offs (121) (9)
----- -----
Balance at end of period $ 7,076 $ 4,529
===== =====
At June 30, 2008 and September 30, 2007, the Bank had non-accruing loans
totaling approximately $9,391,000 and $1,490,000, respectively. At June 30,
2008 and September 30, 2007, no loans were 90 days or more past due and still
accruing interest. Interest income recognized on a cash basis on non-accrual
loans for the three months ended June 30, 2008 and 2007 was $8,000 and
$11,000, respectively, and for the nine months ended June 30, 2008 and 2007
was $20,000 and $22,000, respectively. The average investment in non-accrual
loans for the nine months ended June 30, 2008 and the year ended September 30,
2007 was $5,294,000 and $623,000, respectively.
12
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets.
At At
June 30, September 30,
2008 2007
----------------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 101 $ 252
Commercial real estate 717 90
Construction and land development 7,393 1,000
Land 933 28
Consumer loans 233 --
Commercial business loans 14 120
-------- -------
Total 9,391 1,490
Accruing loans which are contractually
past due 90 days or more: -- --
-------- -------
Total -- --
Total of non-accrual and
90 days past due loans 9,391 1,490
OREO and other
repossessed items 879 --
-------- -------
Total non-performing assets $ 10,270 $ 1,490
======== =======
Restructured loans $ -- $ --
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 1.67% 0.29%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 1.41% 0.23%
Non-performing assets as a percentage
of total assets 1.55% 0.23%
Loans receivable (1) $563,729 $520,138
======= =======
Total assets $663,754 $644,848
______________ ======= =======
(1) Includes loans held-for-sale and is before the allowance for loan losses.
13
Following is a summary of information related to impaired loans (in
thousands):
At June 30,
2008 2007
----------------
Impaired loans without a valuation allowance $4,904 $ 982
Impaired loans with a valuation allowance 4,487 --
$9,391 $ 982
Valuation allowance related to impaired loans $ 540 $ --
(4) 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 June 30, 2008 and 2007, 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 Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
--------------- ---------------
Basic EPS computation
Numerator-net income (loss) $ (546) $ 2,138 $2,655 $6,009
Denominator-weighted average
common shares outstanding 6,446,303 6,713,777 6,467,874 6,863,253
--------- --------- --------- ---------
Basic EPS $ (0.08) $ 0.32 $ 0.41 $0.88
Diluted EPS computation
Numerator-net income (loss) $ (546) $ 2,138 $ 2,655 $6,009
Denominator-weighted average
common shares outstanding 6,446,303 6,713,777 6,467,874 6,863,253
Effect of dilutive stock options(1) 78,515 193,827 119,246 215,232
Effect of dilutive MRDP shares -- 2,561 - 2,045
--------- --------- --------- ---------
Weighted average common shares
and common stock equivalents 6,524,818 6,910,165 6,587,120 7,080,530
--------- --------- --------- ---------
Diluted EPS $ (0.08) $ 0.31 $ 0.40 $ 0.85
(1) For the three months ended June 30, 2008, stock options of 49,546 were
excluded from the computation ofdiluted earnings per share due to their
anti-dilutive effect.
14
(5) 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.
(6) 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 10% annual installments 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 June 30,
2008, options for 279,416 shares are available for future grant under these
plans.
Following is activity under the plans:
Nine Months Ended
June 30, 2008
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 72,728 6.12 1.66
Forfeited -- -- --
Granted -- -- --
-------
Options outstanding, end of period 339,946 $ 7.67 $1.92
Options exercisable, end of period 333,278 $ 7.63 $1.91
15
Nine Months Ended
June 30, 2007
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 (110,470) 6.73 1.76
Forfeited (1,000) 7.61 1.99
Granted -- -- --
-------
Options outstanding, end of period 412,674 $ 7.39 $1.87
Options exercisable, end of period 391,670 $ 7.30 $1.85
The aggregate intrinsic value of all options outstanding (with exercise prices
below the stock's current fair market value) at June 30, 2008 was $395,000.
The aggregate intrinsic value of all options (with exercise prices below the
stock's current market value) that were exercisable at June 30, 2008 was
$395,000. The aggregate intrinsic value of all options outstanding at June
30, 2007 was $3.43 million. The aggregate intrinsic value of all options that
were exercisable at June 30, 2007 was $3.29 million.
At June 30, 2008 there were 6,668 unvested options, all of which are assumed
to vest. The aggregate intrinsic value of unvested options (with exercise
prices below the stock's current fair market value) was $100 on June 30, 2008.
There were 12,336 options that vested during the nine months ended June 30,
2008 with an aggregate grant date fair value of $28,000. There were 23,004
options that vested during the nine months ended June 30, 2007 with an
aggregate grant date fair value of $48,000.
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Nine Months Ended
June 30,
-------
(In thousands)
2008 2007
---- ----
Proceeds from options exercised $445 $ 744
Related tax benefit recognized 15 463
Intrinsic value of options exercised 451 1,231
Options outstanding at June 30, 2008 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)
----------- ------ ------- ----------- ------ -------- -----------
16
$ 6.00-6.19 171,082 $ 6.00 0.6 171,082 $ 6.00 0.6
6.80-7.45 56,638 7.45 2.9 56,638 7.45 2.9
7.60-7.98 6,000 7.91 3.9 5,000 7.90 3.9
9.53 56,680 9.52 4.7 51,012 9.52 4.7
11.46-11.63 49,546 11.51 5.5 49,546 11.51 5.5
------- -------
339,946 $ 7.67 2.4 333,278 $ 7.63 2.4
There were no options granted during the nine months ended June 30, 2008 and
June 30, 2007.
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 nine
months ended June 30, 2008, the Company awarded 20,315 MRDP shares to officers
and directors. These shares had a weighted average grant date fair value of
$12.76 per share. During the nine months ended June 30, 2007 the Company
awarded 15,080 shares to officers and directors. These shares had a weighted
average grant date fair value of $17.44 per share.
At June 30, 2008, there were a total of 41,979 unvested MRDP shares with an
aggregated grant date fair value of $667,000. There were 3,016 MRDP shares
that vested during the nine months ended June 30, 2008 with an aggregated
grant date fair value of $53,000. There were no MRDP shares that vested
during the nine months ended June 30, 2007. At June 30, 2008, there were
71,751 shares available for future award under the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Nine Months Ended June 30,
2008 2007
-------------------------
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in income $ 4 $ 93 $ 19 $ 40
Related tax benefit recognized 1 32 7 14
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 $ 1 $ 36 $ 37
2009 2 143 145
2010 1 143 144
2011 -- 137 137
2012 -- 84 84
2013 -- 11 11
Total $ 4 $ 554 $ 558
17
(7) 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, which did not have a material impact on the
Company's consolidated financial statements. As of June 30, 2008, 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
nine months ended June 30, 2008 was immaterial.
The components of the provision (benefit) for income taxes for the nine months
ended June 30, 2008 and 2007 are as follows (in thousands):
Nine Months Ended June 30,
2008 2007
-------------------------
Current $ 3,255 $ 2,984
Deferred (1,037) (178)
------ ------
Total federal income taxes $ 2,218 $ 2,806
The components of the Company's prepaid federal income taxes and net deferred
tax assets included in other assets as of June 30, 2008 and September 30, 2007
are as follows (in thousands):
At June 30, At September 30,
2008 2007
------ ------
Prepaid federal income taxes $ 1,072 $ 1,154
Net deferred tax assets 1,506 884
------ ------
Total $ 2,578 $ 2,038
The components of the Company's deferred tax assets and liabilities at June
30, 2008 and September 30, 2007 are as follows (in thousands):
At June 30, At September 30,
2008 2007
Deferred tax assets ---- ----
Accrued interest on loans $ 13 $ 1
18
Accrued vacation 137 106
Deferred compensation 52 69
Unearned ESOP shares 448 438
Allowance for loan losses 2,476 1,679
CDI 216 189
Unearned MRDP shares 47 26
Net unrealized securities losses -- 404
Capital loss carry-forward 928 --
Stock option compensation expense 21 20
----- -----
Total deferred tax assets 4,338 2,932
Deferred tax liabilities
FHLB stock dividends 906 906
Depreciation 190 243
Goodwill 494 396
Certificate of deposit valuation 22 23
Mortgage servicing rights 447 368
Net unrealized securities gains 11 --
Prepaid expenses 91 112
----- -----
Total deferred tax liabilities 2,161 2,048
Valuation allowance for capital loss on
sale of securities (671) --
----- -----
Net deferred tax assets $ 1,506 $ 884
The provision for federal income taxes for the nine months ended June 30, 2008
and 2007 differs from that computed at the statutory corporate tax rate as
follows (in thousands):
Nine Months Ended June 30,
2008 2007
Amount Percent Amount Percent
------ ------- ------ -------
Taxes at statutory rate $ 1,705 35.0% $ 3,085 35.0%
Non-taxable BOLI income (126) (2.6) (120) (1.4)
Non-deductible capital loss 729 15.0 -- --
Other-net (90) (1.9) (159) (1.8)
Federal income taxes $ 2,218 45.5% $ 2,806 31.8%
(8) DIVIDEND / SUBSEQUENT EVENT
On July 8, 2008, the Company announced a quarterly cash dividend of $0.11 per
common share, payable August 22, 2008, to shareholders of record as of the
close of business on August 8, 2008.
On July 22, 2008, the Bank's Board of Directors approved plans to convert the
Bank's loan production office located in Centralia Washington (Lewis County)
into a full service branch that will be constructed in Chehalis, Washington
(Lewis County). The Bank anticipates that the branch will open in early 2009.
(9) 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"),
19
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 and
nine months ended June 30, 2008. 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. Factors which could cause actual
results to differ materially, include, but are not limited to, the credit
risks of lending activities, including changes in the level and trend of loan
delinquencies and charge-offs; changes in the general economic conditions,
either nationally or in our market areas; changes in the level of general
interest rates, deposit interest rates, our net interest margin and funding
sources; fluctuations in the demand for loans, the number of unsold homes and
other properties and fluctuations in real estate values in our market areas;
results of examinations of the Company by the Federal Reserve and of the Bank
by the Federal Deposit Insurance Corporation, the Washington Department of
Financial Institutions or other regulatory authorities, including the
possibility that any such regulatory authority may, among other things,
require us to increase our reserve for loan losses or to write-down assets;
our ability to control operating costs and expenses; our ability to implement
our branch expansion strategy; our ability to successfully integrate any
assets, liabilities, customers, systems, and management personnel we have
acquired or may in the future acquire into our operations and our ability to
realize related revenue synergies and cost savings within expected time frames
and any goodwill charges related thereto; our ability to manage loan
delinquency rates; our ability to retain key members of our senior management
team; costs and effects of litigation, including settlements and judgments;
increased competitive pressures among financial service companies; changes in
consumer spending, borrowing and savings habits; legislative or regulatory
changes that adversely affect our business; adverse changes in the securities
markets; inability of key third-party providers to perform their obligations
to us; changes in accounting policies and practices, as may be adopted by the
financial institution regulatory agencies or the Financial Accounting
Standards Board; war or terrorist activities; other economic, competitive,
governmental, regulatory, and technological factors affecting our operations,
pricing, products and services and other risks detailed in the Company's
reports filed with the Securities and Exchange Commission, including the
Annual Report on Form 10-K for the fiscal year ended September 30, 2007. The
Company undertakes no responsibility to update or revise any forward-looking
statements.
20
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 June 30, 2008, the
Company had total assets of $663.75 million and total shareholders' equity of
$74.78 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. 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 (which is in the
process of being converted to a full service branch) in the following market
areas:
* Grays Harbor County
* Thurston County
* Pierce County
* King County
* Kitsap County
* Lewis County
Historically, the principal lending activity of the Bank has consisted of the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences and loans for the construction of one- to four-family
residences. The Bank does not participate in the subprime mortgage market.
Since 2001, the Bank has expanded its business banking capabilities and has
emphasized the origination of commercial real estate and commercial and
industrial loans.
In recent years, national real estate and home values have increased
substantially, as a result of the generally strong national economy,
speculative investing, and aggressive lending practices that provided loans to
marginal borrowers (generally termed as "subprime" loans). The strong economy
also resulted in significant increases in residential and commercial real
estate values and commercial and residential construction. The national and
the Pacific Northwest residential lending market has experienced a noted
slowdown in recent months, as loan delinquencies and foreclosure rates have
increased. Nationally, foreclosures and delinquencies are also being driven
by investor speculation in the states of Arizona, California, Florida and
Nevada, while job losses and depressed economic conditions in Indiana,
Michigan and Ohio have resulted in the highest level of seriously delinquent
loans. Louisiana and Mississippi also have high residential loan
delinquencies as a result of Katrina-related economic factors.
21
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 June 30, 2008 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 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 MSRs 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 June 30, 2008 and September 30, 2007
The Company's total assets increased by $18.91 million, or 2.9%, to $663.75
million at June 30, 2008 from $644.85 million at September 30, 2007, primarily
attributable to a $41.31 million, or 8.0%, increase in net loans receivable
and a $6.87 million, or 41.2% increase in cash equivalents. These increases
were partially offset by a $30.46 million, or 47.6% decrease in investment and
mortgage-backed securities.
Total deposits increased by $13.20 million, or 2.8%, to $479.93 million at
June 30, 2008 from $466.74 million at September 30, 2007, primarily
attributable to an increase in N.O.W. checking account balances, certificate
of deposit account balances, and savings account balances. These increases
were partially offset by a decrease in non-interest bearing account balances.
22
Shareholders' equity increased by $228,000, or 0.3%, to $74.78 million at June
30, 2008 from $74.55 million at September 30, 2007. The increase in
shareholders' equity was primarily a result of retained net income, an
increase in the accumulated other comprehensive income category and stock
option exercises. These increases were 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 $6.87 million, or 41.2%, to
$23.54 million at June 30, 2008 from $16.67 million at September 30, 2007.
The increase was primarily a result of increases in non-interest bearings
balances, federal funds sold and interest bearing deposits in banks.
Investment Securities and Mortgage-backed Securities: Investment and
mortgage-backed securities decreased by $30.46 million, or 47.6%, to $33.51
million at June 30, 2008 from $63.97 million at September 30, 2007, as a
result of the maturity or call of U.S. agency securities, regular amortization
and prepayments on mortgage-backed securities, and the redemption of mutual
funds. At June 30, 2008, the Company's securities' portfolio was comprised of
mortgage-backed securities of $32.55 million (of which $14.66 million were
classified as held to maturity), mutual funds of $934,000 and U.S. agency
securities of $28,000.
During the quarter ended June 30, 2008, the Company redeemed its investment in
the AMF family of mutual funds and recognized a $2.82 million non-recurring
loss on the redemption. The net asset value of the mutual funds had declined
primarily as a result of the uncertainty in spreads in the bond market for
mortgage-related securities and downgrades to a small percentage of the
underlying securities. The Company redeemed $29.12 million in mutual funds
and received $22.19 million in underlying mortgage-backed securities and $6.93
million in cash. For additional information, see Note 2 of the Notes to
Condensed Consolidated Financial Statements contained in "Item 1, Financial
Statements."
Loans: Net loans receivable increased by $41.31 million, or 8.0%, to $556.65
million at June 30, 2008 from $515.34 million at September 30, 2007. The
increase in the portfolio was primarily a result of a $24.11 million increase
in construction loans (net of undisbursed portion of construction loans in
process), a $12.92 million increase in commercial real estate loans, a $5.14
million increase in commercial business loans, a $3.36 million increase in
one- to four-family loans, and a $2.31 million increase in multi-family
loans. The increase in construction loans has been primarily centered in
commercial real estate, which increased $16.33 million and land development
loans, which increased $8.48 million. Construction loans on a speculative
basis decreased $6.03 million during the nine months ended June 30, 2008. A
$4.22 million decrease in land loans also partially offset the increases.
Loan originations decreased to $204.60 million for the nine months ended June
30, 2008 compared to $233.37 million for the nine months ended June 30, 2007.
The reduction in loan volume was primarily attributable to a slowdown in the
Pacific Northwest economy. 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 $35.31 million for the nine months
ended June 30, 2008 compared to$21.64 million for the nine months ended June
30, 2007.
For additional information, see Note 3 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Premises and Equipment: Premises and equipment decreased to $16.29 million at
June 30, 2008 from $16.58 million at September 30, 2007, primarily as a result
of depreciation recorded on depreciable assets.
23
Goodwill and Core Deposit Intangible: The value of goodwill remained
unchanged at $5.65 million at June 30, 2008 from September 30, 2007. The
amortized value of core deposit intangible decreased to $1.03 million at June
30, 2008 from $1.22 million at September 30, 2007. The decrease is
attributable to scheduled amortization of the core deposit intangible.
Deposits: Deposits increased by $13.20 million, or 2.8%, to $479.93 million at
June 30, 2008 from $466.74 million at September 30, 2007. The increase was
primarily a result of a $10.10 million increase in N.O.W. checking account
balances, a $3.29 million increase in non-brokered certificate of deposit
account balances, a $2.19 million increase in savings account balances and a
$1.86 million increase in brokered certificate of deposit account balances.
These increases were partially offset by a $4.26 million decrease in
non-interest bearing account balances. For additional information, see the
section entitled "Deposit Breakdown" included herein.
FHLB Advances and Other Borrowings: FHLB advances and other borrowings
increased by $5.36 million to $105.65 million at June 30, 2008 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 $228,000 to
$74.78 million at June 30, 2008 from $74.55 million at September 30, 2007,
primarily as a result of net income of $2.65 million, an increase in the
accumulated other comprehensive income equity category of $804,000, proceeds
from stock option exercises of $460,000, and increases to additional paid in
capital of $244,000 and unearned ESOP shares of $198,000 due to vesting
associated with the Company's benefit plans. The increase from these
items was partially offset by share repurchases of $1.92 million and cash
dividends to shareholders of $2.21 million.
During the nine months ended June 30, 2008 the Company repurchased 144,950
shares of its common stock for $1.92 million, an average price of $13.26 per
share. No shares were, however, repurchased during the quarter ended June 30,
2008. Cumulatively, the Company has repurchased 7,783,934 shares (58.9%) of
the 13,225,000 shares that were issued in its 1998 initial public offering, at
an average price of $8.98 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 increased to
1.55% at June 30, 2008 from 0.23% at September 30, 2007, as non-performing
loans ("NPLs") increased to $9.39 million at June 30, 2008 from $1.49 million
at September 30, 2007 and OREO increased to $879,000.
Total NPLs of $9.39 million at June 30, 2008 were comprised of 31 loans
including 16 single family speculative home loans (eleven located in Pierce
County and five located in Thurston County) totaling $5.6 million, a $1.81
million participation interest in a land development loan located in Clark
County, eight land loans totaling $933,000, one commercial real estate loan
(located in Kitsap County) for $717,000, three home equity loans totaling
$233,000, one single family home loan for $101,000 and one commercial
business loan for $14,000. These non-performing loans represent 13 credit
relationships. The Company had net charge-offs totaling $121,000 during the
nine months ended June 30, 2008, and the reserve for principal impairments on
non-accrual loans was increased by $465,000 to $540,000 during this period.
Impairments may result in actual charge-offs in the future.
OREO increased to $879,000 at June 30, 2008 and consisted of one single-family
residence in Pierce County.
For additional information, see Note 3 of the Notes to Condensed Consolidated
Financial Statements contained in "Item 1, Financial Statements."
Deposit Breakdown
-----------------
24
The following table sets forth the composition of the Company's deposit
balances.
At June 30, 2008 At September 30, 2007
---------------- ---------------------
(In thousands)
Non-interest bearing $ 50,701 $ 54,962
N.O.W. checking 90,476 80,372
Savings 58,604 56,412
Money market accounts 48,082 48,068
Certificates of deposit under $100 128,791 135,528
Certificates of deposit $100 and over 77,343 67,316
Certificates of deposit - brokered 25,937 24,077
------- -------
Total deposits $479,934 $466,735
======= =======
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 June 30, At September 30,
2008 2007
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Short-term $ -- 0.0% $30,000 30.1%
Long-term 104,645 100.0 69,697 69.9
------- ----- ------ -----
Total FHLB advances $104,645 100.0% $99,697 100.0%
======= ===== ====== =====
The Bank's FHLB borrowings mature at various dates through September 2017 and
bear interest at rates ranging from 3.49% to 5.54%. The weighted average
interest rate on FHLB borrowings at June 30, 2008 was 4.22%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
Remainder of 2008 $ 18
2009 4,627
2010 20,000
2011 20,000
2012 10,000
Thereafter 50,000
-------
Total $ 104,645
=======
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 and Nine Months Ended June 30,
2008 and 2007
25
The Company reported a net loss of $(546,000) for the quarter ended June 30,
2008 compared to net income of $2.14 million for the quarter ended June 30,
2007. The loss was the result of a non-recurring impairment charge of $2.82
million ($2.59 million net of income tax) resulting from the redemption of the
Company's investment in the AMF family of mutual funds. Diluted earnings per
share decreased to a loss of $(0.08) for the quarter ended June 30, 2008 from
earnings of $0.31 for the quarter ended June 30, 2007. The non-recurring
impairment charge reduced diluted earnings per share by $0.39 for the quarter
ended June 30, 2008.
The Company's net income decreased by $3.35 million, or 55.8%, to $2.66
million for the nine months ended June 30, 2008 from $6.01 million for the
nine months ended June 30, 2007. Diluted earnings per share decreased 52.9%
to $0.40 for the nine months ended June 30, 2008 from $0.85 for the nine
months ended June 30, 2007.
The decreases in diluted earnings per share were primarily a result of a
non-recurring impairment charge on the redemption of the Company's investment
in the AMF family of mutual funds and increases in the provision for loan
losses during the three and nine months ended June 30, 2008. The increased
provisions were 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.
A more detailed explanation of the income statement categories is presented
below.
Net Income: Earnings for the quarter ended June 30, 2008 decreased by $2.68
million to a loss of $(546,000) from $2.14 million for the quarter ended June
30, 2007. Earnings per diluted share for the quarter ended June 30, 2008
decreased to a loss of $(0.08) from $0.31 for the quarter ended June 30, 2007.
The $0.39 decrease in diluted earnings per share for the quarter ended June
30, 2008 was primarily a result of a $2.82 million ($2.59 million net
of income tax - $0.39 per diluted share) loss on the redemption of mutual
funds, a $240,000 ($159,000 net of income tax - $0.02 per diluted share)
increase in the provision for loan losses, a $158,000 ($104,000 net of income
tax - $0.02 per diluted share) decrease in net interest income, and a $158,000
($104,000 net of income tax - $0.02 per diluted share) increase in non-
interest expense. These decreases to earnings per share were partially offset
by a $428,000 ($282,000 net of income tax - $0.04 per diluted share) increase
in non-interest income exclusive of the $2.82 million non-recurring impairment
charge on the mutual fund redemption, and a decrease in the number of weighted
average shares outstanding ($0.02 per diluted share) primarily as a result of
share repurchases.
Net income for the nine months ended June 30, 2008 decreased by $3.35 million,
or 55.8%, to $2.66 million from $6.01 million for the nine months ended June
30, 2007. Earnings per diluted share for the nine months ended June 30, 2008
decreased to $0.40 from $0.85 for the nine months ended June 30, 2007. The
$0.45 decrease in diluted earnings per share for the nine months ended June
30, 2008 was primarily a result of a $2.82 million ($2.59 million net of
income tax - $0.38 per diluted share) loss on the redemption of mutual funds,
a $1.98 million ($1.31 million net of income tax - $0.18 per diluted share)
increase in the provision for loan losses and a $380,000 ($251,000 net
of income tax - $0.03 per diluted share) increase in non-interest expense.
These decreases to earnings per share were partially offset by a $668,000
($441,000 net of income tax - $0.06 per diluted share) increase in net
interest income, a $576,000 ($380,000 net of income tax - $0.05 per diluted
share) increase in non-interest income exclusive of the $2.82 million
non-recurring impairment charge on the mutual fund redemption, and a decrease
in the number of weighted average shares outstanding ($0.03 per diluted share)
primarily as a result of share repurchases.
Net Interest Income: Net interest income decreased by $158,000, or 2.4%, to
$6.50 million for the quarter ended June 30, 2008 from $6.66 million for the
quarter ended June 30, 2007. The decrease in net interest income was
primarily attributable to interest rate decreases, which compressed margins,
and the reversal of interest on loans placed on non-accrual status. These
decreases were, however, partially offset by a larger interest earning asset
base. Total interest and dividend income decreased by $446,000, or 4.1%, to
$10.37
26
million for the quarter ended June 30, 2008 from $10.81 million for the
quarter ended June 30, 2007 as the yield on interest earning assets decreased
to 6.75% from 7.58%. Total average interest earning assets increased by
$43.78 million to $614.38 million for the quarter ended June 30, 2008 from
$570.60 million for quarter ended June 30, 2007. Total interest expense
decreased by $288,000, or 6.9%, to $3.87 million for the quarter ended June
30, 2008 from $4.16 million for the quarter ended June 30, 2007 as the average
rate paid on interest bearing liabilities decreased to 2.96% for the quarter
ended June 30, 2008 from 3.42% for the quarter ended June 30, 2007. Total
average interest bearing liabilities increased by $39.32 million to $526.40
million for the quarter ended June 30, 2008 from $487.08 million for the
quarter ended June 30, 2007. The net interest margin decreased to 4.23% for
the quarter ended June 30, 2008 from 4.67% for the quarter ended June 30,
2007. The margin compression was primarily attributable to significant
interest rate decreases by the Federal Reserve which reduced the yield on
interest earning assets at a faster pace than the Bank was able to reduce its
funding costs. The reversal of interest income on loans placed on non-accrual
status also contributed to the margin compression and reduced the net interest
margin by approximately eight basis points during the quarter ended June 30,
2008. For additional information, see the section below entitled "Rate Volume
Analysis."
Net interest income increased by $668,000, or 3.4%, to $20.09 million for the
nine months ended June 30, 2008 from $19.42 million for the nine months ended
June 30, 2007. The increase in net interest income was primarily attributable
to a larger interest earning asset base, which was partially offset by margin
compression. Total interest and dividend income increased by $2.02 million,
or 6.6%, to $32.77 million for the nine months ended June 30, 2008 from $30.75
million for the nine months ended June 30, 2007 as average total interest
earning assets increased by $57.01 million. The yield on interest earning
assets decreased to 7.21% for the nine months ended June 30, 2008 from 7.47%
for the nine months ended June 30, 2007. Total interest expense increased by
$1.36 million, or 12.0%, to $12.68 million for the nine months ended June 30,
2008 from $11.33 million for the nine months ended June 30, 2007 as average
total interest bearing liabilities increased by $58.61 million. The average
rate paid on interest bearing liabilities decreased to 3.24% for the nine
months ended June 30, 2008 from 3.26% for the nine months ended June 30, 2007.
The net interest margin decreased to 4.42% for the nine months ended June 30,
2008 from 4.72% for the nine months ended June 30, 2007. The margin
compression was primarily attributable to significant interest rate cuts by
the Federal Reserve which reduced the yield on interest earnings assets at a
greater level than the Bank was able to reduce its funding costs. The
reversal of interest income on loans placed on non-accrual status also
contributed to the margin compression and reduced the net interest margin by
approximately eleven basis points during the nine months ended June 30, 2008.
For additional information, see the section below entitled "Rate Volume
Analysis."
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 Nine months ended
June 30, 2008 June 30, 2008
compared to three months compared to nine months
ended June 30, 2007 ended June 30, 2007
increase (decrease) increase (decrease)
due to due to
------ ------
Net Net
Rate Volume Change Rate Volume Change
---- ------ ------ ---- ------ ------
(In thousands)
Interest-earning assets:
Loans receivable(1) ($1,407) $1,252 $155) ($105) $3,001 $2,896
27
Investments and
mortgage-backed
securities 220 (335) (115) (30) (530) (560)
FHLB stock and
equity securities (131) (23) (154) (151) (18) (169)
Federal funds sold (39) 17 (22) (73) (31) (104)
Interest-bearing deposits (7) 7 -- (22) (17) (39)
Total net increase (decrease)
in income on interest-
earning assets (1,364) 918 (446) (381) 2,405 2,024
Interest-bearing
liabilities:
Savings accounts -- (5) (5) (3) (23) (26)
NOW accounts 22 15 37 67 12 79
Money market Accounts (92) 6 (86) (3) 27 24
Certificate accounts (334) 225 (109) 17 946 963
Short-term borrowings (252) (351) (603) (243) (486) (729)
Long-term borrowings (82) 560 478 -- 1,045 1,045
Total net increase (decrease)
in expense on interest
bearing liabilities (738) 450 (288) (165) 1,521 1,356
Net increase (decrease) in
net interest income ($626) $ 468 ($158) ($216) $ 884 $ 668
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
Provision for Loan Losses: Provisions for loan losses of $500,000 and $2.40
million were made during the three and nine months ended June 30, 2008
compared to provisions of $260,000 and $416,000 made during the three and
nine months ended June 30, 2007. The increased provisions were made primarily
as a result of an increase in non-performing loans, an increase in the level
of performing loans classified as substandard to $12.70 million at June
30, 2008 compared to $7.32 million at September 30, 2007 under the Bank's loan
grading system, loan portfolio growth, and uncertainties in the housing market
in certain market areas of the Pacific Northwest.
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. Management's analysis, however, for the nine
months ended June 30, 2008, placed greater emphasis on the Bank's construction
and land development loan portfolio and the effect of various factors such as
geographic and loan type concentrations. The Bank also reviewed the national
trend of declining home sales with potential housing market value
depreciation. Based on its comprehensive analysis, management deemed the
allowance for loan losses of $7.08 million at June 30, 2008 (1.26% of loans
receivable and 75% of non-performing loans)
28
adequate to provide for probable losses based on an evaluation of known and
inherent risks in the loan portfolio at that date. Loans placed on
non-accrual status are subjected to an impairment analysis to determine an
appropriate reserve amount to be held against each loan. The aggregate
impairment amount determined at June 30, 2008 was $540,000. The allowance for
loan losses was $4.53 million (0.90% of loans receivable and 461% of non-
performing loans) at June 30, 2007. The Company had net charge-offs of
$121,000 during the three and nine months ended June 30, 2008 and net charge-
offs of $3,000 and $9,000 for the three and nine months ended June 30, 2007,
respectively.
Non-performing loans increased by $7.90 million to $9.39 million during the
nine months ended June 30, 2008 primarily as a result of five speculative
construction builders becoming delinquent on their loans (which totaled
$5.58 million) from the Bank and a one-eighth participation interest of $1.81
million in a residential land development loan being placed on non-accrual
status.
Management also downgraded additional loans to its substandard loan grade
classifications during the nine months ended June 30, 2008. Under the Bank's
Classification of Assets Policy, 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 comprehensive allowance for loan loss methodology loans classified as
substandard are assumed to have more risk and therefore have higher loss
factors associated with them. A majority of the loans downgraded during the
nine months ended June 30, 2008 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 economic conditions, management
believes that certain speculative construction and land development loans have
assumed a higher risk profile and were therefore downgraded during the period.
Management believes that the allowance for loan losses as of June 30, 2008 was
adequate to absorb the known and inherent risks of loss in the loan portfolio
at that date. While management believes the estimates and assumptions
used in its determination of the adequacy of the allowance are reasonable,
there can be no assurance that such estimates and assumptions will not be
proven incorrect in the future, or that the actual amount of future provisions
will not exceed the amount of past provisions or that any increased provisions
that may be required will not adversely impact the Company's financial
condition and results of operations. In addition, the determination of the
amount of the Bank's allowance for loan losses is subject to review by bank
regulators as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination. For additional
information, see Note 3 of the Notes to Condensed Consolidated Financial
Statements contained in "Item 1, Financial Statements."
Non-interest Income: Total non-interest income decreased by $2.39 million to a
loss of $(893,000) for the quarter ended June 30, 2008 from income of $1.50
million for the quarter ended June 30, 2007, primarily as a result of a
$2.82 million non-recurring loss on the redemption of investments in the AMF
family of mutual funds. Non-interest income, excluding the non-recurring
mutual fund redemption loss increased by $428,000, or 28.5%, to $1.93 million
for the quarter ended June 30, 2008 from $1.50 million for the quarter ended
June 30, 2007. This increase was primarily a result of increased service
charges on deposits and increased income from loan sales (gain on sale of
loans and servicing income on loans sold). The increase in service charges on
deposits was primarily a result of implementing a new automated overdraft
decisioning system during the quarter and increasing the fee charged for
overdrafts. The increased income from loan sales was primarily a result of an
increase in the dollar value of residential mortgage loans sold in the
secondary market during the quarter. The sale of fixed rate one-to
four-family mortgage loans totaled $16.02 million for the quarter ended June
30, 2008 compared to $7.76 million for the quarter ended June 30, 2007. The
increase in loan sales was primarily attributable to lower interest rates for
30-year fixed rates loans which increased refinancing activity.
29
Total non-interest income decreased by $2.25 million, or 51.0%, to $2.16
million for the nine months ended June 30, 2008 from $4.41 million for the
nine months ended June 30, 2007, primarily as a result of a $2.82 million non-
recurring loss on the redemption of investments in the AMF family of mutual
funds. Non-interest income, excluding the non-recurring mutual fund
redemption loss increased by $576,000, or 13.1% to $4.98 million for the
nine months ended June 30, 2008 from $4.41 million for the nine months ended
June 30, 2007. This increase was primarily a result of increased income from
loan sales (gain on sale of loans and servicing income on loans sold),
increased service charges on deposits and increased ATM transaction fees. The
increase in income from loan sales was primarily a result of an increase in
the dollar value of residential mortgage loans sold in the secondary market
during the quarter. The sale of fixed rate one-to four-family mortgage loans
totaled $35.31 million for the nine months ended June 30, 2008 compared to
$21.64 million for the nine months ended June 30, 2007. The increase in loan
sales was primarily attributable to lower interest rates for 30-year fixed
rate loans which increased refinancing activity. The increase in service
charges on deposits was primarily a result of implementing a new automated
overdraft decisioning system and increasing the fee charged for overdrafts.
The increase in ATM transaction fees was a result of increased ATM usage.
Non-interest Expense: Total non-interest expense increased by $158,000, or
3.3%, to $4.92 million for the quarter ended June 30, 2008 from $4.76 million
for the quarter ended June 30, 2007. The increase was primarily attributable
to a $60,000 increase in salaries and employee benefits expense, a $49,000
increase in deposit related expenses, and a $38,000 increase in advertising
expense. The increased salary and benefit expense was primarily attributable
to annual salary adjustments (effective October 1, 2007). The increased
deposit related expenses were primarily attributable to expenses associated
with several new deposit related programs. The increased advertising expense
was primarily attributable to marketing efforts associated with deposit
gathering initiatives. Partially offsetting these increased expenses was a
$38,000 decrease in premises and equipment. The decrease in premises
and equipment expense was primarily attributable to the sale of a building
that previously served as a branch facility. The gain on the sale of the
building resulted in a $123,000 decrease to premises and equipment expenses
during the quarter ended June 30, 2008.
Total non-interest expense increased by $380,000, or 2.6%, to $14.98 million
for the nine months ended June 30, 2008 from $14.60 million for the nine
months ended June 30, 2008. The increase was primarily attributable to a
$415,000 increase in salaries and employee benefits expense and smaller
increases in advertising expense and ATM expense. The increased salary and
benefit expense was primarily attributable to annual salary adjustments
(effective October 1, 2007) and the addition of several employees. The
increased expenses were partially offset by a $193,000 decrease in premises
and equipment expense. 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 $171,000 and a gain on the
sale of a building that reduced expenses by $123,000. Provision for Income
Taxes: The provision for income taxes decreased to $734,000 for the quarter
ended June 30, 2008 from $1.00 million for the quarter ended June 30, 2007
primarily as a result of lower income before taxes. The provision for income
taxes was also impacted by the $2.82 million loss on the redemption of mutual
funds. The redemption of the mutual funds resulted in a capital loss which
can only be deducted for tax purposes to the extent that capital gains are
realized within a three year carry back period and a five year carry forward
period. The Company has estimated that it will have $679,000 in capital gains
during the allowable tax periods to offset the capital loss. Therefore $2.14
million of the $2.82 million loss has been treated as non-deductible for tax
purposes. The Company's effective tax rate exclusive of the mutual fund
redemption loss (and associated tax impact) was 32.06% for the quarter ended
June 30, 2008 and 31.87% for the quarter ended June 30, 2007.
The provision for income taxes decreased to $2.22 million for the nine months
ended June 30, 2008 from $2.81 million for the nine months ended June 30, 2007
primarily as a result of lower income before taxes.
30
The Company's effective tax rate exclusive of the mutual fund redemption loss
(and associated tax impact) was 31.83% for the nine months ended June 30, 2008
and 31.83% for the nine months ended June 30, 2007.
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 nine months ended June 30, 2008. 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 41.2% to $23.54 million at
June 30, 2008 from $16.67 million at September 30, 2007. The increase in
liquid assets was primarily reflected in an increase in federal funds sold,
interest bearing deposits in banks and non-interest bearing cash equivalents.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds for loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At June 30, 2008,
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 6.36%.
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
$104.65 million was outstanding and $78.31 million was available for
additional borrowings at June 30, 2008. The Bank also has a $10.00 million
overnight credit line with Pacific Coast Banker's Bank ("PCBB"). At June 30,
2008, 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 of Seattle
and PCBB.
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 June 30, 2008, the Bank had loan commitments totaling $46.61 million and
undisbursed loans in process totaling $57.34 million. The Bank anticipates
that it will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year
from June 30, 2008 totaled $186.71 million. Historically, the Bank has been
able to retain a significant amount of its non-brokered certificates of
deposit as they mature. At June 30, 2008, the Bank had $25.94 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.
31
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At June 30, 2008, the Bank was in compliance with all applicable
capital requirements. For additional details see the section below entitled
"Regulatory Capital."
Regulatory Capital
------------------
The following table compares the Company's and the Bank's actual capital
amounts at June 30, 2008 to its minimum regulatory capital requirements at
that date (dollars in thousands):
To Be Well
Capitalized
Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
Tier 1 capital
(to average assets):
Consolidated $68,005 10.41% $26,133 4.00% N/A N/A
Timberland Bank 60,205 9.23 26,078 4.00 $32,598 5.00%
Tier 1 capital
(to risk-weighted assets):
Consolidated 68,005 12.08 22,511 4.00 N/A N/A
Timberland Bank 60,205 10.71 22,480 4.00 33,719 6.00
Total capital
(to risk-weighted assets):
Consolidated 75,040 13.33 45,023 8.00 N/A N/A
Timberland Bank 67,240 11.96 44,959 8.00 56,199 10.00
32
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
---------------- ----------------
PERFORMANCE RATIOS:
Return (loss) on average assets (1) (0.33)% 1.38% 0.54% 1.34%
Return (loss) on average equity (1) (2.91)% 11.24% 4.73% 10.36%
Net interest margin (1) 4.23% 4.67% 4.42% 4.72%
Efficiency ratio 87.73% 58.35% 67.31% 61.26%
At At
June 30, September 30,
2008 2007
----------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 9,391 $ 1,490
OREO and other repossessed assets 879 --
Total non-performing assets $10,270 $ 1,490
Non-performing assets to total assets 1.55% 0.23%
Allowance for loan losses to
non-performing loans 75% 322%
Restructured loans $ -- --
Book value per share (2) $ 10.83 $ 10.72
Book value per share (3) $ 11.46 $ 11.39
Tangible book value per share (2) (4) $ 9.87 $ 9.73
Tangible book value per share (3) (4) $ 10.44 $ 10.34
----------------
(1) Annualized
(2) Calculation includes ESOP shares not committed to be released
(3) Calculation excludes ESOP shares not committed to be released
(4) Calculation subtracts goodwill and core deposit intangible from the
equity component
Three Months Ended Nine Months Ended
June 30, June 30,
2008 2007 2008 2007
---------------- ----------------
AVERAGE BALANCE SHEET:
Average total loans $ 560,515 $ 494,137 $ 548,346 $ 466,200
Average total interest earning
assets 614,383 570,597 605,949 548,942
Average total assets 659,998 619,120 652,804 598,688
Average total interest bearing
deposits 415,495 388,610 412,904 381,946
Average FHLB advances & other
borrowings 110,903 98,467 109,794 82,139
Average shareholders' equity 74,956 76,087 74,901 77,364
33
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 June 30, 2008 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 June 30, 2008, 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 errors 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.
34
Item 1A. Risk Factors
Listed below are updates to the market risk information provided in the
Company's Annual Report of Form 10-K for the fiscal year ended September 30,
2007 ("2007 Form 10-K"). These updates should be read in conjunction
with the 2007 Form 10-K.
Our business is subject to general economic risks that could adversely impact
our results of operations and financial condition.
* Change in economic conditions, particularly a further economic slowdown
in western Washington could hurt our business.
Our business is directly affected by market conditions, trends in the industry
and finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our
control. In 2007, the housing and real estate sectors experienced an economic
slowdown that has continued into 2008. Further deterioration in economic
conditions, in particular within our primary market areas could result in the
following consequences, among others, any of which could hurt our business
materially: loan delinquencies may increase; problem assets and foreclosures
may increase; demand for our products and services may decline; and collateral
for loans made by us, especially real estate, may decline in value, in turn
reducing a customer's borrowing power and reducing the value of assets and
collateral securing our loans.
* Downturns in the real estate markets in our primary market areas could
hurt our business.
Our business activities and credit exposure are primarily concentrated in
western Washington. While we do not have any sub-prime loans, our
construction and land development loan portfolios, our land loan portfolio,
our commercial and multi-family loan portfolios and certain of our other loans
have been affected by the downturn in the residential real estate market. We
anticipate that further declines in the real estate markets in our primary
market areas would hurt our business. If real estate values continue to
decline the collateral for our loans will provide less security. As a result,
our ability to recover on defaulted loans by selling the underlying real
estate will be diminished, and we would be more likely to suffer losses on
defaulted loans. The events and conditions described in this risk factor
could therefore have a material adverse effect on our business, results of
operations and financial condition.
* We may suffer losses in our loan portfolio despite our underwriting
practices.
We seek to mitigate the risks inherent in our loan portfolio by adhering to
specific underwriting practices. Although we believe that our underwriting
criteria are appropriate for the various kinds of loans we make, we may incur
losses on loans that meet our underwriting criteria, and these losses may
exceed the amounts set aside as reserves in our allowance for loan losses.
Recent negative developments in the financial industry and credit markets may
continue to adversely impact our financial condition and results of
operations.
Negative developments beginning in the latter half of 2007 in the sub-prime
mortgage market and the securitization markets for such loans, together with
substantially increased oil prices and other factors, have resulted in
uncertainty in the financial markets in general and a related general economic
downturn, which have continued in 2008. Many lending institutions, including
us, have experienced substantial declines in the performance of their loans,
including construction and land development loans and land loans. Moreover,
competition among depository institutions for deposits and quality loans has
increased significantly. In addition, the value of real estate collateral
supporting many construction and land development loans, land loans,
commercial loans, multi-family loans, and home mortgages have declined and may
continue to decline. Bank and holding company stock prices have been
negatively affected, as has the ability of banks and holding
35
companies to raise capital or borrow in the debt markets compared to recent
years. These conditions may have a material effect on our financial condition
and results of operations. In addition, as a result of the foregoing factors,
there is a potential for new federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory
agencies are expected to be very aggressive in responding to concerns and
trends identified in examinations, including the expected issuance of formal
enforcement orders. Negative developments in the financial industry and the
impact of new legislation in response to those developments could restrict our
business operations, including our ability to originate or sell loans, and
adversely impact our results of operations and financial condition.
We may be required to make further increases in our provisions for loan losses
and to charge off additional loans in the future, which could adversely affect
our results of operations.
For the nine months ended June 30, 2008 we recorded a provision for loan
losses of $2.40 million compared to $416,000 for the nine months ended June
30, 2007, which reduced our net income for the nine months ended June 30,
2008. We also recorded net loan charge-offs of $121,000 for the nine months
ended June 30, 2008 compared to $9,000 for the nine months ended June 30,
2007. We are experiencing increases in non-performing loans and credit
losses. Generally, our non-performing loans and assets reflect operating
difficulties of individual borrowers resulting from weakness in the economy of
western Washington. In addition, slowing sales have been a contributing
factor to the increase in non-performing loans as well as the increase in
delinquencies. At June 30, 2008 our total non-performing loans had increased
to $9.39 million compared to $982,000 at June 30, 2007. While construction
and land development loans represented 32.4% of our total loan portfolio at
June 30, 2008 they represented 78.7% of our non-performing loans at that date.
If current trends in the housing and real estate markets continue, we expect
that we will continue to experience increased delinquencies and credit losses.
Moreover, if a recession occurs, we expect that it would negatively impact
economic conditions in our market areas and that we could experience
significantly higher delinquencies and credit losses. An increase in our
credit losses or our provision for loan losses would adversely affect our
financial condition and results of operations.
Our loan portfolio is concentrated in loans with a higher risk of loss.
We originate construction and land development loans, land loans, commercial
and multi-family mortgage loans, commercial business loans, consumer loans,
and residential mortgage loans primarily within our market areas. Generally,
these types of loans, other than the residential mortgage loans, have a higher
risk of loss than the residential mortgage loans. We had approximately
$518.13 million (including $57.34 million in undisbursed construction loans in
process) outstanding in these types of higher risk loans at June 30, 2008.
These loans have greater credit risk than residential real estate loans for a
number of reasons, including those described below:
Construction and Land Development Loans. This type of lending contains the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost (including interest) of the project. If the
estimate of construction cost proves to be inaccurate, we may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be
inaccurate, we may be confronted at, or prior to, the maturity of the loan
with a project the value of which is insufficient to assure full repayment.
In addition, speculative construction loans to a builder are often associated
with homes that are not pre-sold, and thus pose a greater potential risk
to us than construction loans to individuals on their personal residences.
Loans on land under development or held for future construction also poses
additional risk because of the lack of income being produced by the property
and the potential illiquid nature of the collateral. These risks can be
significantly impacted by supply and demand conditions. As a result, this
type of lending often involves the disbursement of substantial funds with
repayment on the success of
36
the ultimate project and the ability of the borrower to sell or lease the
property, rather than the ability of the borrower or guarantor themselves to
repay principal and interest. At June 30, 2008, we had $202.03 million
(including $57.34 million of undisbursed loans in process) or 32.4% of total
loans in construction and land development loans.
Land Loans. These loans are secured by undeveloped land or improved lots and
involve a greater risks than residential mortgage loans because these loans
are more difficult to evaluate. If the estimate of property value proves to
be inaccurate, in the event of default or foreclosure the Bank may be
confronted with a property the value of which is insufficient to assure full
repayment. Land loans also expose a lender to greater credit risk than loans
secured by residential real estate because the collateral securing these loans
typically cannot be sold as easily as residential real estate.
Commercial and Multi-family Mortgage Loans. These loans typically involve
higher principal amounts than other types of loans, and repayment is dependent
upon income generated, or expected to be generated, by the property securing
the loan in amounts sufficient to cover operating expenses and debt service,
which may be adversely affected by changes in the economy or local market
conditions. Commercial and multi-family mortgage loans also expose a lender
to greater credit risk than loans secured by residential real estate because
the collateral securing these loans typically cannot be sold as easily as
residential real estate. At June 30, 2008, we had $178.25 million or 28.6% of
total loans in commercial and multi-family mortgage loans.
Commercial Business Loans. Commercial business loans are primarily made based
on the cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. The borrowers' cash flow may be unpredictable, and
collateral securing these loans may fluctuate in value. Most often, this
collateral is accounts receivable, inventory, equipment or real estate. In
the case of loans secured by accounts receivable, the availability of funds
for the repayment of these loans may be substantially dependent on the
ability of the borrower to collect amounts due from its customers. Other
collateral securing loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. At
June 30, 2008, we had $23.3 million or 3.7% of total loans in commercial
business loans.
Consumer Loans. Consumer loans include home equity lines of credit, second
mortgage loans, automobile loans, boat loans, recreational vehicle loans and
unsecured loans. The collateral securing consumer loans may not provide an
adequate source of repayment of the loan due to, declining real estate values,
depreciation, damage, or loss. In addition, consumer loan collections are
generally dependent on the borrower's financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on these loans. At June 30, 2008, we had $58.06
million or 9.3% of total loans in consumer loans.
Liquidity risk could impair our ability to fund operations and jeopardize our
financial condition.
Liquidity is essential to our business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities or the terms of which are
acceptable to us could be impaired by factors that affect us specifically or
the financial services industry or economy in general. Factors that could
detrimentally impact our access to liquidity sources include a decrease in the
level of our business activity as a result of a downturn in the markets in
which our loans are concentrated or adverse regulatory action against us. Our
ability to borrow could also be impaired by factors that are not specific to
us, such as a disruption in the financial markets or negative views and
expectations about the prospects for the financial services industry in light
of the recent turmoil faced by banking organizations and the continued
deterioration in credit markets.
37
If external funds were not available, this could adversely impact our growth
and prospects.
We rely on deposits and advances from the FHLB of Seattle and other borrowings
to fund our operations. Although we have historically been able to replace
maturing deposits and advances as necessary, we might not be able to replace
such funds in the future if, among other things, our results of operations or
financial condition or the results of operations or financial condition of the
FHLB of Seattle or market conditions were to change. Although we consider
such sources of funds adequate for liquidity needs, there can be no
assurance in this regard and we may be compelled to elect or seek additional
sources of financing in the future. Likewise, we may seek additional debt in
the future to achieve our long-term business objectives, in connection with
future acquisitions or for other reasons. There can be no assurance
additional borrowings, if sought, would be available to us or, if available,
would be on favorable terms. If additional financing sources are unavailable
or not available on reasonable terms, our financial condition, results of
operations and future prospects could be materially adversely affected.
We may elect or be compelled to seek additional capital in the future, but
that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. In addition, we may
elect to raise additional capital to support our business or to finance
acquisitions, if any, or we may otherwise elect to raise additional capital.
In that regard, a number of financial institutions have recently raised
considerable amounts of capital as a result of a deterioration in their
results of operations and financial condition arising from the turmoil in the
mortgage loan market, deteriorating economic conditions, declines in real
estate values and other factors. Should we be required by regulatory
authorities to raise additional capital, we may seek to do so through the
issuance of, among other things, our common stock or preferred stock.
Our ability to raise additional capital, if needed, will depend on conditions
in the capital markets, economic conditions and a number of other factors,
many of which are outside of our control, and on our financial performance.
Accordingly, we cannot assure you of our ability to raise additional capital
if needed or on terms acceptable to us. If we cannot raise additional capital
when needed, it may have a material adverse effect on our financial condition,
results of operation and prospects.
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 June 30,
2008:
Period Total No. Average Price Total No. of Shares Maximum No. of
of Shares Paid per Share Purchased as Part Shares that May
Purchased of Publicly Yet Be Purchased
Announced Plan Under the Plan(1)
04/01/2008-
04/30/2008 - - -- 343,468
38
05/01/2008-
05/31/2008 - -- -- 343,468
06/01/2008-
06/30/2008 -- -- -- 343,468
Total -- $ -- -- 343,468
(1) On February 25, 2008, the Company announced a share repurchase plan
authorizing the repurchase of up to 5% of its outstanding shares, or
343,468 shares. As of June 30, 2008 no shares under this plan had
been repurchased.
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)
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.
39
(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.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Timberland Bancorp, Inc.
Date: August 6, 2008 By: ______________________________
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: August 6, 2008 By: ______________________________
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
41
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
42
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: August 6, 2008 /s/Michael R. Sand
------------------
Michael R. Sand
Chief Executive Officer
43
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: August 6, 2008 /s/Dean J. Brydon
------------------
Dean J. Brydon
Chief Financial Officer
44
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 June
30, 2008 ("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: August 6, 2008