UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 APRIL 30, 2008
----- ------------------------------------
Common stock, $.01 par value 6,880,553
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Shareholders'
Equity 5
Condensed Consolidated Statements of Cash Flows 6-7
Condensed Consolidated Statements of Comprehensive
Income 8
Notes to Condensed Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-29
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 30
Item 4. Controls and Procedures 30
Item 4T. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 1A - Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31-32
Item 5. Other Information 32
Item 6. Exhibits 32
SIGNATURES 33
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2008 and September 30, 2007
Dollars in thousands, except share amounts
March 31, September 30,
2008 2007
-------------------------
Assets (Unaudited)
Cash equivalents:
Non-interest bearing $ 12,165 $ 10,813
Interest bearing deposits in banks 883 2,082
Federal funds sold 1,220 3,775
-------------------------
14,268 16,670
-------------------------
Investments and mortgage-backed securities: held
to maturity 60 71
Investments and mortgage-backed securities:
available for sale 42,868 63,898
Federal Home Loan Bank ("FHLB") stock 5,705 5,705
Loans receivable 549,593 519,381
Loans held for sale 4,949 757
Less: Allowance for loan losses (6,697) (4,797)
-------------------------
Net loans receivable 547,845 515,341
-------------------------
Accrued interest receivable 3,055 3,424
Premises and equipment 16,470 16,575
Other real estate owned ("OREO") and other
repossessed items - - - -
Bank owned life insurance ("BOLI") 12,654 12,415
Goodwill 5,650 5,650
Core deposit intangible ("CDI") 1,096 1,221
Mortgage servicing rights 1,145 1,051
Other assets 3,697 2,827
-------------------------
Total assets $654,513 $644,848
=========================
Liabilities and shareholders' equity
Deposits $469,837 $466,735
FHLB advances 105,663 99,697
Other borrowings: repurchase agreements 815 595
Other liabilities and accrued expenses 3,356 3,274
-------------------------
Total liabilities 579,671 570,301
-------------------------
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;
March 31, 2008 - 6,876,653 shares issued and
outstanding
September 30, 2007 - 6,953,360 shares issued and
outstanding 69 70
Additional paid in capital 8,527 9,923
Unearned shares - Employee Stock Ownership Plan
("ESOP") (2,908) (3,040)
Retained earnings 70,125 68,378
Accumulated other comprehensive loss (971) (784)
-------------------------
Total shareholders' equity 74,842 74,547
-------------------------
Total liabilities and shareholders' equity $654,513 $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 six months ended March 31, 2008 and 2007
Dollars in thousands, except per share amounts
(unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
2008 2007 2008 2007
------------------- ------------------
Interest and dividend income
Loans receivable $10,358 $9,283 $21,121 $18,070
Investments and mortgage-backed
securities 142 381 391 835
Dividends from mutual funds and
FHLB stock 395 413 818 833
Federal funds sold 27 77 58 142
Interest bearing deposits in banks 4 14 14 53
------------------- ------------------
Total interest and dividend
income 10,926 10,168 22,402 19,933
------------------- ------------------
Interest expense
Deposits 3,117 2,657 6,450 5,247
FHLB advances - short term 66 288 534 647
FHLB advances - long term 1,066 725 1,814 1,248
Other borrowings 6 10 14 27
------------------- ------------------
Total interest expense 4,255 3,680 8,812 7,169
------------------- ------------------
Net interest income 6,671 6,488 13,590 12,764
Provision for loan losses 700 156 1,900 156
------------------- ------------------
Net interest income after
provision for loan losses 5,971 6,332 11,690 12,608
------------------- ------------------
Non-interest income
Service charges on deposits 648 663 1,344 1,369
Gain on sale of loans, net 144 64 237 171
BOLI net earnings 119 114 239 227
Servicing income on loans sold 179 115 297 246
ATM transaction fees 302 272 601 535
Fee income from non-deposit
investment sales 17 41 56 61
Other 145 155 278 295
------------------- ------------------
Total non-interest income 1,554 1,424 3,052 2,904
------------------- ------------------
Non-interest expense
Salaries and employee benefits 2,986 2,766 5,906 5,551
Premises and equipment 650 660 1,114 1,283
Advertising 268 201 450 379
Loss (gain) from real estate
operations - - (11) - - (29)
ATM expenses 142 107 291 226
Postage and courier 130 130 247 235
Amortization of CDI 62 71 124 143
State and local taxes 147 133 298 272
Professional fees 145 172 292 349
Other 676 710 1,335 1,426
------------------- ------------------
Total non-interest expense 5,206 4,939 10,057 9,835
------------------- ------------------
Income before federal income
taxes 2,319 2,817 4,685 5,677
Federal income taxes 734 901 1,484 1,807
------------------- ------------------
Net income $ 1,585 $1,916 $ 3,201 $ 3,870
=================== ==================
Earnings per common share:
Basic $ 0.25 $ 0.28 $ 0.49 $ 0.56
Diluted $ 0.24 $ 0.27 $ 0.48 $ 0.54
Weighted average shares outstanding:
Basic 6,441,367 6,866,664 6,478,600 6,937,990
Diluted 6,560,806 7,083,420 6,618,101 7,165,712
Dividends paid per share: $ 0.11 $ 0.09 $ 0.21 $ 0.18
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 six months ended March 31, 2008
Dollars in thousands, except per share amounts and common stock shares
Accumu-
lated
Unearned Other
Common Common Additional Shares Compre-
Stock Shares Stock Paid-In Issued to Retained hensive
Outstanding Amount Capital ESOP Earnings Loss Total
----------- ------- -------- --------- -------- ------ ---------
Balance, Sept. 30, 2006 7,515,352 $38 $20,700 ($3,305) $62,933 ($1,001) $79,365
Net income - - - - - - - - 8,163 - - 8,163
Stock split - - 36 - - - - (36) - - - -
Issuance of MRDP (1) shares 15,080 - - - - - - - - - - - -
Repurchase of
common stock (687,542) (4) (12,427) - - - - - - (12,431)
Exercise of stock options 110,470 - - 1,207 - - - - - - 1,207
Cash dividends
($.37 per share) - - - - - - - - (2,682) - - (2,682)
Earned ESOP shares - - - - 354 265 - - - - 619
MRDP compensation expense - - - - 64 - - - - - - 64
Stock option compensation exp. - - - - 25 - - - - - - 25
Unrealized holding gain on
securities available
for sale, net of tax - - - - - - - - - - 217 217
Balance, Sept. 30, 2007 6,953,360 $70 $9,923 ($3,040) $68,378 ($784) $74,547
(Unaudited)
Net income - - - - - - - - 3,201 - - 3,201
Stock split - - - - - - - - - - - - - -
Issuance of MRDP shares 14,315 - - - - - - - - - - - -
Repurchase of
common stock (144,950) (2) (1,920) - - - - - - (1,922)
Exercise of stock options 53,928 1 346 - - - - - - 347
Cash dividends
($0.21 per share) - - - - - - - - (1,454) - - (1,454)
Earned ESOP shares - - - - 105 132 - - - - 237
MRDP compensation expense - - - - 71 - - - - - - 71
Stock option compensation exp. - - - - 2 - - - - - - 2
Unrealized holding loss on
securities available
for sale, net of tax - - - - - - - - - - (187) (187)
Balance, March 31, 2008 6,876,653 $69 $8,527 ($2,908) $70,125 ($971) $74,842
(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 six months ended March 31, 2008 and 2007
In thousands (unaudited)
Six Months Ended March 31,
Cash flow from operating activities 2008 2007
--------------------
Net income $ 3,201 $ 3,870
Non-cash revenues, expenses, gains and losses
included in income:
Provision for loan losses 1,900 156
Depreciation 565 505
Deferred federal income taxes (399) (178)
Amortization of CDI 124 143
Earned ESOP shares 132 133
MRDP compensation expense 63 24
Stock option compensation expense 2 14
Stock option tax effect less excess tax benefit 4 79
Gain on sale of OREO, net - - (18)
Gain on the disposition of premises and equipment (171) (5)
BOLI cash surrender value increase (239) (227)
Gain on sale of loans (237) (171)
Increase (decrease) in deferred loan origination fees (186) 205
Loans originated for sale (23,241) (13,191)
Proceeds from sale of loans 19,286 13,877
Decrease in other assets, net (71) (430)
Decrease in other liabilities and accrued expenses, net 82 95
--------------------
Net cash provided by operating activities 815 4,881
Cash flow from investing activities
Decrease in certificates of deposit held for investment - - 100
Proceeds from maturities of securities available
for sale 20,720 14,575
Proceeds from maturities of securities held to
maturity 10 2
Increase in loans receivable, net (30,026) (56,191)
Additions to premises and equipment (464) (511)
Proceeds from the disposition of premises and equipment 175 5
Proceeds from sale of OREO - - 33
--------------------
Net cash used in investing activities (9,585) (41,987)
Cash flow from financing activities
Increase in deposits, net 3,102 13,061
Proceeds from FHLB advances - long term 50,000 30,000
Repayment of FHLB advances - long term (15,034) (5,031)
Decrease in FHLB advances - short term (29,000) 4,500
Increase (decrease) in repurchase agreements 220 (359)
Proceeds from exercise of stock options 332 585
ESOP tax effect 105 190
MRDP compensation tax effect 8 2
Stock option excess tax benefit 11 268
Repurchase of common stock (1,922) (5,643)
Payment of dividends (1,454) (1,338)
--------------------
Net cash provided by financing activities 6,368 36,235
Net decrease in cash equivalents (2,402) (871)
Cash equivalents
Beginning of period 16,670 22,789
--------------------
End of period $ 14,268 $ 21,918
--------------------
See notes to unaudited condensed consolidated financial statements
(continued)
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded)
For the six months ended March 31, 2008 and 2007
In thousands
(unaudited)
Six Months Ended March 31,
2008 2007
--------------------
Supplemental disclosure of cash flow information
Income taxes paid $ 2,361 $ 1,714
Interest paid 8,743 7,053
Supplemental disclosure of non-cash investing activities
Change in unrealized holding gain (loss) on
securities held for sale, net of tax ($187) $ 266
Loans transferred to OREO and other repossessed
assets - - 71
Supplemental disclosure of non-cash financing activities
Shares issued to MRDP $ 210 $ 56
See notes to unaudited condensed consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended March 31, 2008 and 2007
In thousands
(unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
2008 2007 2008 2007
----------------- ----------------
Comprehensive income:
Net income $1,585 $1,916 $3,201 $3,870
Unrealized holding gain (loss) on
securities available for sale,
net of tax (251) 139 (187) 266
----------------- ----------------
Total comprehensive income $1,334 $2,055 $3,014 $4,136
================= ================
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 six months ended
March 31, 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
March 31, 2008 presentation with no change to net income or shareholders'
equity previously reported.
(2) EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed by dividing
net income by the weighted average number of common shares and common stock
equivalents for items that are dilutive, net of shares assumed to be
repurchased using the treasury stock method at the average share price for the
Company's common stock during the period. Common stock equivalents arise from
assumed conversion of outstanding stock options and awarded but not released
MRDP shares. In accordance with Statement of Position ("SOP") 93-6,
Employers' Accounting for Employee Stock Ownership Plans, issued by
9
the American Institute of Certified Public Accountants, shares owned by the
Bank's ESOP that have not been allocated are not considered to be outstanding
for the purpose of computing earnings per share. At March 31, 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 Six Months
Ended March 31, Ended March 31,
2008 2007 2008 2007
---------------- ------------------
Basic EPS computation
Numerator - net income $1,585 $1,916 $3,201 $3,870
Denominator - weighted average
common shares outstanding 6,441,367 6,866,664 6,478,600 6,937,990
--------- --------- --------- ---------
Basic EPS $ 0.25 $ 0.28 $ 0.49 $ 0.56
Diluted EPS computation
Numerator - net income $1,585 $1,916 $3,201 $3,870
Denominator - weighted average
common shares outstanding 6,441,367 6,866,664 6,478,600 6,937,990
Effect of dilutive stock options 119,439 214,626 139,501 225,934
Effect of dilutive MRDP shares - - 2,130 - - 1,788
--------- --------- --------- ---------
Weighted average common shares
and common stock equivalents 6,560,806 7,083,420 6,618,101 7,165,712
--------- --------- --------- ---------
Diluted EPS $ 0.24 $ 0.27 $ 0.48 $ 0.54
(3) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Statement
of Financial Accounting Standards ("SFAS" or "Statement") No. 123(R), Share
Based Payment, which requires measurement of the compensation cost for all
stock-based awards based on the grant-date fair value and recognition of
compensation cost over the service period of stock-based awards. The fair
value of stock options is determined using the Black-Scholes valuation model,
which is consistent with the Company's valuation methodology previously
utilized for options in footnote disclosures required under SFAS No. 123. The
Company has adopted SFAS No. 123(R) using the modified prospective method,
which provides for no restatement of prior periods and no cumulative
adjustment to equity accounts. It also provides for expense recognition, for
both new and existing stock-based awards.
(4) STOCK COMPENSATION PLANS
Stock Option Plans
------------------
Under the Company's stock option plans (i.e., the 1999 Stock Option Plan and
the 2003 Stock Option Plan), the Company may grant options for up to a
combined total of 1,622,500 shares of common stock to employees, officers and
directors. Shares issued may be purchased in the open market or may be issued
from authorized and unissued shares. The exercise price of each option equals
the fair market value of the Company's common stock on the date of grant. The
options generally vest over a ten-year period, which may be accelerated if the
Company meets certain performance criteria. Generally, options vest in annual
installments 10% on each of the ten anniversaries from the date of the grant
and if the Company meets three of four established performance criteria the
vesting is accelerated to 20% for that year. These four performance criteria
are: (i) generating a return on assets which exceeds that of the median of all
thrifts in the 12th FHLB District having assets within $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
10
$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 March 31, 2008, options for 279,416 shares
are available for future grant under these plans.
Following is activity under the plans:
Six Months Ended
March 31, 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 53,928 6.15 1.66
Forfeited -- -- --
Granted -- -- --
Options outstanding, end of period 358,746 $7.58 $1.90
Options exercisable, end of period 351,078 $7.55 $1.89
Six Months Ended
March 31, 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 (84,958) 6.88 1.79
Forfeited (1,000) 7.61 1.99
Granted -- -- --
Options outstanding, end of period 438,186 $7.33 $1.86
Options exercisable, end of period 408,514 $7.23 $1.84
The aggregate intrinsic value of all options outstanding at March 31, 2008 was
$1.46 million. The aggregate intrinsic value of all options that were
exercisable at March 31, 2008 was $1.44 million. The aggregate intrinsic
value of all options outstanding at March 31, 2007 was $4.51 million. The
aggregate intrinsic value of all options that were exercisable at March 31,
2007 was $4.25 million.
11
At March 31, 2008 there were 7,668 unvested options, all of which are assumed
to vest, with an aggregate intrinsic value of $20,000. There were 11,336
options that vested during the six months ended March 31, 2008 with an
aggregate grant date fair value of $26,000. The were 14,336 options that
vested during the six months ended March 31, 2007 with an aggregate grant date
fair value of $31,000.
Proceeds, related tax benefits realized from options exercised and intrinsic
value of options exercised were as follows:
Six Months Ended
March 31,
--------
(In thousands)
2008 2007
---- ----
Proceeds from options exercised $332 $585
Related tax benefit recognized 15 347
Intrinsic value of options exercised 351 938
Options outstanding at March 31, 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)
------------ ------ ------- ----------- ------ ------- -----------
$ 6.00-6.19 189,882 $ 6.00 0.8 189,882 $ 6.00 0.8
6.80-7.45 56,638 7.45 3.2 56,638 7.45 3.2
7.60-7.98 6,000 7.91 4.1 4,000 7.91 4.1
9.53 56,680 9.52 4.9 51,012 9.52 4.9
11.46-11.63 49,546 11.51 5.8 49,546 11.51 5.8
------- -------
358,746 $ 7.58 2.6 351,078 $ 7.30 2.5
There were no options granted during the six months ended March 31, 2008 and
March 31, 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 six
months ended March 31, 2008, the Company awarded 14,315 MRDP shares to
officers and directors. These shares had a weighted average grant date fair
value of $14.69 per share. During the six months ended March 31, 2007 the
Company awarded 3,080 shares to directors. These shares had a weighted
average grant date fair value of $18.24 per share.
12
At March 31, 2008, there were a total of 38,379 unvested MRDP shares with an
aggregated grant date fair value of $618,000. There were 616 MRDP shares that
vested during the six months ended March 31, 2008 with an aggregated grant
date fair value of $11,000. There were no MRDP shares that vested during the
six months ended March 31, 2007. At March 31, 2008, there were 77,751 shares
available for future award under the MRDP.
Expenses for Stock Compensation Plans
-------------------------------------
Compensation expenses for all stock-based plans were as follows:
Six Months Ended March 31,
2008 2007
---------------------------
(In thousands)
Stock Stock Stock Stock
Options Grants Options Grants
------- ------ ------- ------
Compensation expense recognized in
income $2 $71 $13 $27
Related tax benefit recognized 1 24 5 9
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 $ 3 $ 67 $ 70
2009 2 134 136
2010 1 134 135
2011 -- 127 127
2012 -- 74 74
2013 -- 3 3
--- ---- ----
Total $ 6 $539 $545
(5) INCOME TAXES
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement 109, Accounting for
Income Taxes. FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company adopted the provisions
of FIN 48 on October 1, 2007, which did not have a material impact on the
Company's consolidated financial statements. As of March 31, 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
six months ended March 31, 2008 was immaterial.
(6) DIVIDEND / SUBSEQUENT EVENT
13
On April 24, 2008, the Company announced a quarterly cash dividend of $0.11
per common share, payable May 22, 2008, to shareholders of record as of the
close of business on May 8, 2008.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
under Generally Accepted Accounting Principles ("GAAP"), and expands
disclosures about fair value measurements. SFAS No. 157 also emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and sets out a fair value hierarchy with the highest priority being quoted
prices in active markets. Under SFAS No. 157, fair value measurements are
disclosed by level within that hierarchy. This Statement is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of adoption of SFAS 157 on the Company's consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115. This Statement permits companies to elect to follow fair
value accounting for certain financial assets and liabilities in an effort to
mitigate volatility in earnings without having to apply complex hedge
accounting provisions. The standard also establishes presentation and
disclosure requirements designed to facilitate comparison between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The adoption of this Statement is not expected to have a
material impact on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
The following analysis discusses the material changes in the financial
condition and results of operations of the Company at and for the three and
six months ended March 31, 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. The Company's actual results,
performance, or achievements may differ materially from those suggested,
expressed, or implied by forward looking statements as a result of a wide
variety or range of factors including, but not limited to: interest rate
fluctuations; economic conditions in the Company's primary market areas;
deposit flows; demand for residential, commercial real estate, consumer, and
other types of loans; real estate values; success of new products and
services; technological factors affecting operations; and other risks detailed
in the Company's reports filed with the SEC, including its 2007 Form 10-K.
Accordingly, these factors should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements. The
Company undertakes no responsibility to update or revise any forward-looking
statements.
Overview
Timberland Bancorp, Inc., a Washington corporation, was organized on September
8, 1997 for the purpose of becoming the holding company for Timberland Savings
Bank, SSB upon the Bank's conversion from a Washington-chartered mutual
savings bank to a Washington-chartered stock savings bank ("Conversion"). The
Conversion was completed on January 12, 1998 through the sale and issuance of
13,225,000 shares of common stock by the Company. At March 31, 2008, the
Company had total assets of $654.51 million and total shareholders' equity of
$74.84 million. The Company's business activities generally are limited to
passive
14
investment activities and oversight of its investment in the Bank.
Accordingly, the information set forth in this report relates primarily to the
Bank.
The Bank was established in 1915 as "Southwest Washington Savings and Loan
Association." In 1935, the Bank converted from a state-chartered mutual
savings and loan association to a federally-chartered mutual savings and loan
association, and in 1972 changed its name to "Timberland Federal Savings and
Loan Association." In 1990, the Bank converted to a federally chartered
mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991,
the Bank converted to a Washington-chartered mutual savings bank and changed
its name to "Timberland Savings Bank, SSB." In 2000, the Bank changed its
name to "Timberland Bank." The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to applicable legal limits. The
Bank has been a member of the Federal Home Loan Bank System since 1937. The
Bank is regulated by the Washington State Department of Financial
Institutions, Division of Banks and the FDIC.
The Bank is a community-oriented bank which offers a variety of deposit and
loan products to its customers. The Bank operates 21 branches (including its
main office in Hoquiam) and a loan production office in the following market
areas:
* Grays Harbor County
* Thurston County
* Pierce County
* King County
* Kitsap County
* Lewis County
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 1998, the Bank has emphasized its origination of construction and land
development loans and commercial real estate loans and has increased its
portfolio of commercial business 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 strong increases in residential and commercial real estate
valued and commercial and residential construction. The national 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.
To date, Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties have
not experienced the same level of residential or commercial loan
delinquencies, as the states previously mentioned.
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.
15
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 March 31, 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 MSR portfolio. The Company's
methodology for estimating the fair value of MSRs is highly sensitive to
changes in assumptions. For example, the determination of fair value uses
anticipated prepayment speeds. Actual prepayment experience may differ and
any difference may have a material effect on the fair value. Thus, any
measurement of MSRs' fair value is limited by the conditions existing and
assumptions as of the date made. Those assumptions may not be appropriate if
they are applied at different times.
Comparison of Financial Condition at March 31, 2008 and September 30, 2007
The Company's total assets increased by $9.66 million, or 1.5%, to $654.51
million at March 31, 2008 from $644.85 million at September 30, 2007,
primarily attributable to a $32.50 million, or 6.3%, increase in net loans
receivable. This increase was partially offset by a $21.04 million decrease
in investment and mortgage-backed securities.
Total deposits increased by $3.10 million, or 0.7%, to $469.84 million at
March 31, 2008 from $466.74 million at September 30, 2007 primarily
attributable to an increase in N.O.W. checking account balances and savings
account balances. These increases were partially offset by a decrease in
non-interest bearing account balances and money market account balances.
Shareholders' equity increased by $295,000, or 0.4%, to $74.84 million at
March 31, 2008 from $74.55 million at September 30, 2007. The increase in
shareholders' equity was primarily a result of retained net income, which was
partially offset by share repurchases and cash dividends.
16
A more detailed explanation of the changes in significant balance sheet
categories follows:
Cash Equivalents: Cash equivalents decreased by $2.40 million, or 14.4%, to
$14.27 million at March 31, 2008 from $16.67 million at September 30, 2007.
The decrease was primarily a result of decreases in federal funds sold and
interest bearing deposits in banks, which were partially offset by an increase
in non-interest bearing balances.
Investment Securities and Mortgage-backed Securities: Investment and
mortgage-backed securities decreased by $21.04 million, or 32.9%, to $42.93
million at March 31, 2008 from $63.97 million at September 30, 2007, as a
result of the maturity or call of U.S. agency securities and regular
amortization and prepayments on mortgage-backed securities. At March 31,
2008, the Company's securities' portfolio was comprised of mutual funds of
$31.39 million and mortgage-backed securities of $11.54 million. At March 31,
2008 the mutual funds had gross unrealized losses of $1.55 million as the
market value of the funds was below the amortized cost. These mutual funds
invest primarily in highly rated mortgage-backed products and U.S. agency
securities and their net asset values have been negatively impacted by the
unusually large spreads in the market for mortgage-related products. The
credit ratings of the underlying securities in the funds remain stable and the
Company believes that the risk of principal loss is low. The two largest
mutual fund holdings (ASARX and AULTX) in the portfolio comprise over 83% of
the total mutual fund balance and currently have three star ratings from
Morningstar, Inc. The Company believes that the market value of the
underlying securities will recover as spreads narrow on mortgage-related
securities. However, if the wide pricing spreads on mortgage-related products
continues to persist or if the Company determines that the narrowing spreads
do not positively affect the market value of these funds in the manner
anticipated, the mutual funds may be deemed to be other than temporarily
impaired and a non-cash charge to income may occur. For additional
information, see the "Investment Securities" table included herein.
Loans: Net loans receivable increased by $32.50 million, or 6.3%, to $547.85
million at March 31, 2008 from $515.34 million at September 30, 2007. The
increase in the portfolio was primarily a result of a $21.35 million increase
in construction loans (net of undisbursed portion of construction loans in
process), an $8.25 million increase in commercial real estate loans, a $5.68
million increase in one- to four-family loans (including an increase of $4.19
million in one- to four-family loans held for sale), a $2.78 million increase
in multi-family loans, and a $2.01 million increase in commercial business
loans. These increases were partially offset by a $5.55 million decrease in
land loans and a $300,000 decrease in consumer loans.
Loan originations decreased to $124.47 million for the six months ended March
31, 2008 compared to $166.96 million for the six months ended March 31, 2007.
The reduction in loan volume was primarily attributable to a slowdown in the
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 $19.29 million for the six months ended
March 31, 2008 compared to $13.88 million for the six months ended March 31,
2007.
For additional information, see the sections entitled "Loan Portfolio
Composition" and "Construction and Land Development Loan Portfolio
Composition" included herein.
Premises and Equipment: Premises and equipment decreased to $16.47 million at
March 31, 2008 from $16.58 million at September 30, 2007, primarily as a
result of depreciation recorded on depreciable assets.
Goodwill and Core Deposit Intangible: The value of goodwill remained
unchanged. The amortized value of core deposit intangible decreased to $1.10
million at March 31, 2008 from $1.22 million at September 30, 2007. The
decrease is attributable to scheduled amortization of the core deposit
intangible.
17
Deposits: Deposits increased by $3.10 million, or 0.7%, to $469.84 million at
March 31, 2008 from $466.74 million at September 30, 2007. The increase was
primarily a result of a $9.06 million increase in non-brokered certificate of
deposit account balances, a $7.98 million increase in N.O.W. checking account
balances, and an $800,000 increase in savings account balances. These
increases were partially offset by $9.02 million decrease in brokered
certificate of deposit account balances, a $4.89 million decrease in
non-interest bearing account balances and an $824,000 decrease in money market
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 $6.19 million to $106.48 million at March 31, 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 $295,000 to
$74.84 million at March 31, 2008 from $74.55 million at September 30, 2007,
primarily as a result of net income of $3.20 million and proceeds from stock
option exercises of $347,000. The increase from these items was partially
offset by share repurchases of $1.92 million and cash dividends to
shareholders of $1.45 million.
During the six months ended March 31, 2008 the Company repurchased 144,950
shares of its common stock for $1.92 million, an average price of $13.26 per
share. 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
0.98% at March 31, 2008 from 0.23% at September 30, 2007, as total
non-performing assets increased to $6.39 million at March 31, 2008 from $1.49
million at September 30, 2007.
Total non-performing assets of $6.39 million at March 31, 2008 were comprised
of 17 loans including 11 single family speculative home loans (ten of which
were located in Pierce County) totaling $4.05 million, a $1.87 million
participation interest in a land development loan located in Clark County, two
home equity consumer loans totaling $183,000, one commercial real estate loan
for $152,000, one commercial business loan for $119,000 and one land loan for
$22,000. These non-performing loans represent eight credit relationships.
The Company had no charge-offs during the six months ended March 31, 2008, but
the reserve for principal impairments on non-accrual loans was increased by
$548,000 to $623,000 during this period. For additional information, see the
section entitled "Non-performing Assets" and "Activity in the Allowance for
Loan Losses" included herein.
Investment Securities
---------------------
The following table sets forth the composition of the Company's investment
securities portfolio.
At March 31, At September 30,
2008 2007
Amount Percent Amount Percent
----------------- -----------------
(Dollars in thousands)
Held-to-maturity:
Mortgage-backed securities $ 60 0.1% $ 71 0.1%
Available-for-sale (at fair value)
U.S. agency securities - - - - 18,975 29.7
Mortgage-backed securities 11,476 26.7 13,048 20.4
Mutual funds 31,392 73.2 31,875 49.8
------- ----- ------- -----
18
Total portfolio $42,928 100.0% $63,969 100.0%
======= ===== ======= =====
Loan Portfolio Composition
--------------------------
The following table sets forth the composition of the Company's loan
portfolio.
At March 31, At September 30,
2008 2007
Amount Percent Amount Percent
----------------- -----------------
(Dollars in thousands)
Mortgage loans:
One- to four-family (1) $108,117 17.6% $102,434 17.4%
Multi-family 37,932 6.2 35,157 6.0
Commercial 136,112 22.2 127,866 21.7
Construction and
land development 197,384 32.2 186,261 31.6
Land 55,158 9.0 60,706 10.3
-------- ----- -------- -----
Total mortgage loans 534,703 87.2 512,424 87.0
Consumer loans:
Home equity and second mortgage 47,003 7.7 47,269 8.0
Other 10,888 1.8 10,922 1.9
-------- ----- -------- -----
57,891 9.5 58,191 9.9
Commercial business loans 20,177 3.3 18,164 3.1
-------- ----- -------- -----
Total loans 612,771 100.0% 588,779 100.0%
===== =====
Less:
Undisbursed portion of
construction loans in
process (55,447) (65,673)
Deferred loan origination fees (2,782) (2,968)
Allowance for loan losses (6,697) (4,797)
-------- --------
Total loans receivable, net $547,845 $515,341
======== ========
________________
---------------
(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 March 31, At September 30,
2008 2007
Amount Percent Amount Percent
----------------- -----------------
(Dollars in thousands)
Custom and owner/builder const. $ 46,311 23.4% $ 52,375 28.1%
Speculative construction 42,582 21.6 43,012 23.1
19
Commercial real estate 56,964 28.9 50,518 27.1
Multi-family 21,941 11.1 18,064 9.7
Land development 29,586 15.0 22,292 12.0
-------- ----- -------- -----
Total construction loans $197,384 100.0% $186,261 100.0%
======== ===== ======== =====
Activity in the Allowance for Loan Losses
-----------------------------------------
The following table sets forth information regarding activity in the allowance
for loan losses.
Three Months Ended
March 31,
2008 2007
------------------
(In thousands)
Balance at beginning of period $5,997 $4,121
Provision for loan losses 700 156
Loans charged off - - (6)
Recoveries on loans previously charged off - - 1
------ ------
Net charge-off - - (5)
------ ------
Balance at end of period $6,697 $4,272
====== ======
Six Months Ended
March 31,
2008 2007
-----------------
(In thousands)
Balance at beginning of period $4,797 $4,122
Provision for loan losses 1,900 156
Loans charged off - - (7)
Recoveries on loans previously charged off - - 1
------ ------
Net charge-off - - (6)
------ ------
Balance at end of period $6,697 $4,272
====== ======
Non-performing Assets
---------------------
The following table sets forth information with respect to the Company's
non-performing assets.
At At
March 31, September 30,
2008 2007_____
-------------------------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ - - $ 252
Commercial real estate 152 90
Construction and land development 5,912 1,000
Land 22 28
Consumer loans 183 - -
Commercial business loans 119 120
-------- --------
20
Total 6,388 1,490
Accruing loans which are contractually
past due 90 days or more: - - - -
-------- --------
Total - - - -
Total of non-accrual and
90 days past due loans 6,388 1,490
OREO and other
repossessed items - - - -
-------- --------
Total non-performing assets $ 6,388 $ 1,490
======== ========
Restructured loans $ 2,491 $ - -
Non-accrual and 90 days or more past
due loans as a percentage of loans
receivable (1) 1.15% 0.29%
Non-accrual and 90 days or more past
due loans as a percentage of total assets 0.98% 0.23%
Non-performing assets as a percentage
of total assets 0.98% 0.23%
Loans receivable (1) $554,542 $520,138
======== ========
Total assets $654,513 $644,848
======== ========
______________
----------------
(1) Includes loans held-for-sale and is before the allowance for loan losses.
Deposit Breakdown
-----------------
The following table sets forth the composition of the Company's deposit
balances.
At At
March 31, 2008 September 30, 2007
-------------- ------------------
(In thousands)
Non-interest bearing $ 50,068 $ 54,962
N.O.W. checking 88,350 80,372
Savings 57,212 56,412
Money market accounts 47,244 48,068
Certificates of deposit under $100 137,529 135,528
Certificates of deposit $100 and over 74,376 67,316
Certificates of deposit - brokered 15,058 24,077
-------- --------
Total deposits $469,837 $466,735
======== ========
21
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 March 31, At September 30,
2008 2007
Amount Percent Amount Percent
------------------ -----------------
(Dollars in thousands)
Short-term $ 1,000 0.9% $30,000 30.1%
Long-term 104,663 99.1 69,697 69.9
-------- ----- ------- -----
Total FHLB advances $105,663 100.0% $99,697 100.0%
======== ===== ======= =====
The Bank's FHLB borrowings mature at various dates through September 2017 and
bear interest at rates ranging from 3.35% to 5.54%. The weighted average
interest rate on FHLB borrowings at March 31, 2008 was 4.21%. Principal
reduction amounts due for future years ending September 30 are as follows (in
thousands):
Remainder of 2008 $ 1,036
2009 4,627
2010 20,000
2011 20,000
2012 10,000
Thereafter 50,000
--------
Total $105,663
========
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 Six Months Ended March 31,
2008 and 2007
The Company's net income decreased by $331,000, or 17.3%, to $1.59 million for
the quarter ended March 31, 2008 from $1.92 million for the quarter ended
March 31, 2007. Diluted earnings per share decreased 11.1% to $0.24 for the
quarter ended March 31, 2008 from $0.27 for the quarter ended March 31, 2007
The Company's net income decreased by $669,000, or 17.3%, to $3.20 million for
the six months ended March 31, 2008 from $3.87 million for the six months
ended March 31, 2007. Diluted earnings per share decreased 11.1% to $0.48
for the six months ended March 31, 2008 from $0.54 for the six months ended
March 31, 2007.
The decreases in diluted earnings per share were primarily a result of
increases in the provision for loan losses during the three and six months
ended March 31, 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. The decreases in earnings per share attributable to
the increased provisions for loan losses were partially offset by increased
net interest income and a decrease in the weighted average number of shares
outstanding as a result of share repurchases.
A more detailed explanation of the income statement categories is presented
below.
22
Net Income: Net income for the quarter ended March 31, 2008 decreased by
$331,000, or 17.3%, to $1.59 million from $1.92 million for the quarter ended
March 31, 2007. Earnings per diluted share for the quarter ended March 31,
2008 decreased to $0.24 from $0.27 for the quarter ended March 31, 2007. The
$0.03 decrease in diluted earnings per share for the quarter ended March 31,
2008 was primarily a result of a $544,000 ($359,000 net of income tax - $0.05
per diluted share) increase in the provision for loan losses and a $267,000
($176,000 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 $183,000 ($121,000 net of income tax - $0.02 per diluted share)
increase in net interest income, a $130,000 ($86,000 net of income tax - $0.01
per diluted share) increase in non-interest income and a decrease in the
number of weighted average shares outstanding ($0.02 per diluted share)
primarily as a result of share repurchases.
Net income for the six months ended March 31, 2008 decreased by $669,000, or
17.3%, to $3.20 million from $3.87 million for the six months ended March 31,
2007. Earnings per diluted share for the six months ended March 31, 2008
decreased to $0.48 from $0.54 for the six months ended March 31, 2007. The
$0.06 decrease in diluted earnings per share for the six months ended March
31, 2008 was primarily a result of a $1.74 million ($1.15 million net of
income tax - $0.16 per diluted share) increase in the provision for loan
losses and a $222,000 ($147,000 net of income tax - $0.02 per diluted share)
increase in non-interest expense. These decreases to earnings per share were
partially offset by an $826,000 ($545,000 net of income tax - $0.08 per
diluted share) increase in net interest income, a $148,000 ($98,000 net of
income tax - $0.01 per diluted share) increase in non-interest income 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 increased by $183,000, or 2.8%, to
$6.67 million for the quarter ended March 31, 2008 from $6.49 million for the
quarter ended March 31, 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 $758,000, or 7.5%, to $10.93 million for the quarter ended March
31, 2008 from $10.17 million for the quarter ended March 31, 2007 as average
total interest earning assets increased by $54.00 million. The yield on
interest earning assets decreased to 7.27% for the quarter ended March 31,
2008 from 7.44% for the quarter ended March 31, 2007. Total interest expense
increased by $575,000, or 15.6%, to $4.26 million for the quarter ended March
31, 2008 from $3.68 million for the quarter ended March 31, 2007 as average
total interest bearing liabilities increased by $56.54 million. The average
rate paid on interest bearing liabilities increased to 3.30% for the quarter
ended March 31, 2008 from 3.23% for the quarter ended March 31, 2007. The net
interest margin decreased to 4.44% for the quarter ended March 31, 2008 from
4.75% for the quarter ended March 31, 2007. The margin compression was
primarily attributable to increased funding costs and a decreased yield on
interest earning assets. Increased funding costs resulted primarily from an
increased reliance on wholesale sources (FHLB advances and brokered deposits)
to fund loan growth. The decreased yield in interest earning assets was
primarily attributable to the significant interest rate decreases by the
Federal Reserve during the quarter and a reversal of interest on loans placed
in non-accrual status (which reduced the margin by approximately eight basis
points). For additional information, see the section below entitled "Rate
Volume Analysis."
Net interest income increased by $826,000, or 6.5%, to $13.59 million for the
six months ended March 31, 2008 from $12.76 million for the six months ended
March 31, 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
$2.47 million, or 12.4%, to $22.40 million for the six months ended March 31,
2008 from $19.93 million for the six months ended March 31, 2007 as average
total interest earning assets increased by $63.64 million. The yield on
interest earning assets increased to 7.45% for the six months ended March 31,
2008 from 7.41% for the six months ended March 31, 2007. Total interest
expense increased by $1.64 million, or 22.9%, to $8.81 million for the six
months ended March 31, 2008 from $7.17 million for the six months ended March
31, 2007 as average total interest bearing liabilities increased by $65.49
million. The average rate paid on interest bearing liabilities increased to
3.40% for the six months ended March
23
31, 2008 from 3.18% for the six months ended March 31, 2007. The net interest
margin decreased to 4.52% for the six months ended March 31, 2008 from 4.74%
for the six months ended March 31, 2007. The margin compression was primarily
attributable to increased funding costs which were greater than the increased
yield on interest earning assets. Increased funding costs resulted from an
increase in interest rates on deposits and an increased reliance on wholesale
sources (FHLB advances and brokered deposits) to fund loan growth. For
additional information, see the section 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 Six months ended
March 31, 2008 March 31, 2008
compared to three months compared to six months
ended March 31, 2007 ended March 31, 2007
increase (decrease) increase (decrease)
due to due to
------ ------
Rate Volume Net Change Rate Volume Net Change
---- ------ ---------- ---- ------ ----------
(In thousands)
Interest-earning assets:
Loans receivable (1) ($476) $1,552 $1,076 ($62) $3,112 $3,050
Investments and
mortgage-backed
securities 28 (267) (239) 3 (447) (444)
FHLB stock and
equity securities (20) 2 (18) (12) (3) (15)
Federal funds sold (26) (25) (51) (33) (50) (83)
Interest-bearing
deposits (5) (5) (10) (11) (28) (39)
---- ------ ------ ---- ------ ------
Total net increase in
income on interest-
earning assets (499) 1,257 758 (115) 2,584 2,469
Interest-bearing
liabilities:
Savings accounts (1) (9) (10) - - (20) (20)
NOW accounts (2) 15 13 67 44 111
Money market
Accounts 30 2 32 42 - - 42
Certificate accounts 37 387 424 255 815 1,070
Short-term borrowings (60) (165) (225) (87) (40) (127)
Long-term borrowings (106) 447 341 (57) 624 567
Total net increase
in expense on interest
bearing liabilities (102) 677 575 220 1,423 1,643
Net increase (decrease) in
24
net interest income ($397) $ 580 $ 183 ($335) $1,161 $ 826
-----------------
(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 $700,000 and $1.90
million were made during the three and six months ended March 31, 2008
compared to a provision of $156,000 made during the three and six months ended
March 31, 2007. The increased provisions were made primarily as a result of
an increase in non-performing loans, an increase in the level of loans
classified as substandard under the Bank's loan grading system, loan portfolio
growth, and uncertainties in the housing market in certain market areas of the
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 six months
ended March 31, 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 $6.70 million at March 31, 2008 (1.21% of loans
receivable and 105% of non-performing loans) adequate to provide for probable
losses based on an evaluation of known and inherent risks in the loan
portfolio at that date. The allowance for loan losses was $4.27 million
(0.88% of loans receivable and 1,327% of non-performing loans) at March 31,
2007. The Company had no charge-offs during the three and six months ended
March 31, 2008 and net recoveries of $5,000 and $6,000 for the three and six
months ended March 31, 2007, respectively. While there were no charge-offs
during the six months ended March 31, 2008, the reserve for principal
impairments on non-accrual loans was increased by $548,000 to $623,000.
Impairments may result in actual charge-offs in the future.
Non-performing loans increased by $4.90 million to $6.39 million during the
six months ended March 31, 2008 primarily as a result of three speculative
construction builders becoming delinquent on their loans (which totaled $2.98
million) from the Bank and a one-eighth participation interest of $1.87
million in a residential land development loan being placed on non-accrual
status.
The $6.39 million in non-performing loans at March 31, 2008 were comprised of
17 loans including 11 single family speculative home loans totaling $4.05
million (which included one $1.00 million loan located in Pierce County, one
$522,000 loan located in Pierce County, and eight loans located in Pierce
County with balances ranging from $245,000 to $344,000, and one loan located
in Grays Harbor County with an outstanding balance of $63,000), a $1.87
million participation interest in a land development loan located in Clark
County, two home equity consumer loans totaling $183,000, one commercial real
estate loan for $152,000, one commercial business loan for $119,000, and one
land loan for $22,000. These non-performing loans represent eight credit
relationships.
Management also downgraded additional loans to its substandard loan grade
classifications during the six months ended March 31, 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 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 six months ended
March 31, 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
25
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. During
the six months ended March 31, 2008 the Bank also restructured $2.49 million
in loans to a speculative construction borrower by reducing the interest rates
on the loans for a 90 day period.
Management believes that the allowance for loan losses as of March 31, 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 the section entitled "Activity in the Allowance
for Loan Losses" included herein.
Non-interest Income: Total non-interest income increased by $130,000, or 9.1%,
to $1.55 million for the quarter ended March 31, 2008 from $1.42 million for
the quarter ended March 31, 2007, primarily as a result of increased income
from loan sales (gain on sale of loans and servicing income on loans sold).
The sale of fixed rate one-to four-family mortgage loans totaled $11.87
million for the quarter ended March 31, 2008 compared to $6.63 million for the
quarter ended March 31, 2007. The increase in loan sales was primarily
attributable to lower interest rates for 30-year fixed rates loans which
increased refinancing activity.
Total non-interest income increased by $148,000, or 5.1%, to $3.05 million for
the six months ended March 31, 2008 from $2.90 million for the six months
ended March 31, 2007, primarily as a result of increased income from loan
sales (gain on sale of loans and servicing income on loans sold) and increased
ATM transaction fees. The sale of fixed rate one-to four-family mortgage
loans totaled $19.29 million for the six months ended March 31, 2008 compared
to $13.88 million for the six months ended March 31, 2007. The increase in
loan sales was primarily attributable to lower interest rates for 30-year
fixed rate loans which increased refinancing activity.
Non-interest Expense: Total non-interest expense increased by $267,000, or
5.4%, to $5.21 million for the quarter ended March 31, 2008 from $4.94 million
for the quarter ended March 31, 2007. The increase was primarily attributable
to a $220,000 increase in salaries and employee benefits expense and a $67,000
increase in advertising 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 advertising
expense was primarily attributable to marketing efforts associated with
deposit gathering initiatives. The Company's efficiency ratio increased to
63.29% for the quarter ended March 31, 2008 from 62.42% for the quarter ended
March 31, 2007.
Total non-interest expense increased by $222,000, or 2.3%, to $10.06 million
for the six months ended March 31, 2008 from $9.84 million for the six months
ended March 31, 2008. The increase was primarily attributable to a $355,000
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 $169,000 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 $172,000. The Company's efficiency ratio improved to
60.43% for the six months ended March 31, 2008 from 62.78% for the six months
ended March 31, 2007.
Provision for Income Taxes: The provision for income taxes decreased to
$734,000 for the quarter ended March 31, 2008 from $901,000 for the quarter
ended March 31, 2007 primarily as a result of lower income
26
before taxes. The Company's effective tax rate was 31.65% for the quarter
ended March 31, 2008 and 31.98% for the quarter ended March 31, 2007.
The provision for income taxes decreased to $1.48 million for the six months
ended March 31, 2008 from $1.81 million for the six months ended March 31,
2007 primarily as a result of lower income before taxes. The Company's
effective tax rate was 31.68% for the six months ended March 31, 2008 and
31.83% for the six months ended March 31, 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 six months ended March 31, 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 decreased by 14.4% to $14.27 million at
March 31, 2008 from $16.67 million at September 30, 2007. The decrease in
liquid assets was primarily reflected in a decrease in federal funds sold and
a decrease in interest bearing deposits in banks and was partially offset by
an increase in 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 March 31, 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 9.24%.
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
$105.66 million was outstanding at March 31, 2008. The Bank also has a $10.00
million overnight credit line with Pacific Coast Banker's Bank ("PCBB"). At
March 31, 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 March 31, 2008, the Bank had loan commitments totaling $51.14 million and
undisbursed loans in process totaling $55.45 million. The Bank anticipates
that it will have sufficient funds available to meet current
27
loan commitments. Certificates of deposit that are scheduled to mature in
less than one year from March 31, 2008 totaled $206.73 million. Historically,
the Bank has been able to retain a significant amount of its non-brokered
certificates of deposit as they mature. At March 31, 2008, the Bank had
$15.06 million in brokered certificate of deposit accounts, all of which are
scheduled to mature in less than one year. As these brokered certificate of
deposit accounts approach maturity, the Bank will evaluate its liquidity needs
and the cost of other alternative funding sources before determining if
additional brokered deposits will be acquired to replace the maturing brokered
deposits.
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At March 31, 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 Bank's regulatory capital at March 31, 2008
to its minimum regulatory capital requirements at that date (Dollars in
thousands):
Percent of
Amount Adjusted Total Assets (1)
------ ------------------------
Tier 1 (leverage) capital $59,759 9.34%
Tier 1 (leverage) capital requirement 25,584 4.00
------- -----
Excess $34,175 5.34%
======= =====
Tier 1 risk adjusted capital $59,759 10.75%
Tier 1 risk adjusted capital requirement 22,243 4.00
------- -----
Excess $37,516 6.75%
======= =====
Total risk based capital $66,448 11.95%
Total risk based capital requirement 44,486 8.00
------- -----
Excess $21,962 3.95%
======= =====
-----------------
(1) For the Tier 1 (leverage) capital, percent of total average assets
calculation, total average of assets were $639.59 million. For the Tier 1
risk-based capital and total risk-based capital calculations, total
risk-weighted assets were $556.08 million.
28
TIMBERLAND BANCORP, INC. AND SUBSIDIARIES
KEY FINANCIAL RATIOS AND DATA
(Dollars in thousands, except per share data)
Three Months Six Months
Ended March 31, Ended March 31,
2008 2007 2008 2007
---------------- ---------------
PERFORMANCE RATIOS:
Return on average assets (1) 0.98% 1.28% 0.99% 1.32%
Return on average equity (1) 8.48% 9.91% 8.55% 9.92%
Net interest margin (1) 4.44% 4.75% 4.52% 4.74%
Efficiency ratio 63.29% 62.42% 60.43% 62.78%
At At
March 31, September 30,
2008 2007
---------------------------
ASSET QUALITY RATIOS:
Non-performing loans $ 6,388 $ 1,490
OREO and other repossessed assets - - - -
------- -------
Total non-performing assets $ 6,388 $ 1,490
Non-performing assets to total assets 0.98% 0.23%
Allowance for loan losses to
non-performing loans 105% 322%
Restructured loans $ 2,491 - -
Book value per share (2) $ 10.88 $ 10.72
Book value per share (3) $ 11.53 $ 11.39
Tangible book value per share (2) (4) $ 9.90 $ 9.73
Tangible book value per share (3) (4) $ 10.49 $ 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 Six Months
Ended March 31, Ended March 31,
2008 2007 2008 2007
---------------- ---------------
AVERAGE BALANCE SHEET:
---------------------
Average total loans $546,349 $465,460 $ 542,295 $ 452,232
Average total interest earning assets 600,872 546,870 601,754 538,115
Average total assets 647,851 597,015 649,225 588,470
Average total interest bearing
deposits 411,465 380,916 410,542 378,614
Average FHLB advances & other
borrowings 107,572 81,578 107,253 73,688
Average shareholders' equity 74,741 77,340 74,873 78,002
29
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 March 31, 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 March 31, 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.
Item 4T. Controls and Procedures
--------------------------------
Not Applicable.
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.
30
Item 1A. Risk Factors
There have been no material changes in the Risk Factors previously disclosed
in Item 1A of the Company's 2007 Form 10-K.
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 March 31, 2008:
Total No.
of Shares
Purchased as Maximum No.
Total Part of of Shares that
No. of Average Publicly May Yet Be
Shares Price Paid Announced Purchased Under
Period Purchased per Share Plan (1) the Plan(1)(2)
----------------------- --------- ---------- ----------- ---------------
01/01/2008 -
01/31/2008 77,000 12.83 77,000 62,950
02/01/2008 -
02/29/2008 17,950 12.84 17,950 361,418
03/01/2008 -
03/01/2008 - - - - - - 343,468
Total 94,950 $12.83 94,950 343,468
(1) On February 22, 2008, the Company completed its previously announced
share repurchase program. The Company repurchased 5% of its outstanding
common shares or 356,950 shares, at an average price of $15.82 per share. All
shares were repurchased through open market broker transactions and no shares
were directly repurchased from directors or officers of the Company.
(2) On 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 March 31, 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
------------------------------------------------------------
The Company's 2007 Annual Meeting of Shareholders was held on January 22, 2008
at the Hoquiam Timberland Library, 420 7th Street, Hoquiam, Washington. The
results of the vote on the election of directors for a three-year term, the
only item presented at the meeting, were as follows:
For Withheld
No. of Votes Percentage No. of Votes Percentage
------------------------- -------------------------
31
Jon C. Parker 3,864,432 76.96% 1,157,058 23.04%
James C. Mason 4,723,546 94.07% 297,944 5.93%
The following directors, who were not up for re-election at the Annual Meeting
of Shareholders, will continue to serve as directors: Clarence E. Hamre,
Andrea M. Clinton, Michael R. Sand, David A Smith, Harold L. Warren and Ronald
A. Robbel.
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.
(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.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Timberland Bancorp, Inc.
Date: May 5, 2008 By:/s/ Michael R. Sand
-----------------------------------
Michael R. Sand
Chief Executive Officer
(Principal Executive Officer)
Date: May 5, 2008 By:/s/ Dean J. Brydon
-----------------------------------
Dean J. Brydon
Chief Financial Officer
(Principal Financial Officer)
33
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
34
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes Oxley Act
I, Michael R. Sand, certify that:
1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are likely
to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 5, 2008
/s/ Michael R. Sand
----------------------------
Michael R. Sand
Chief Executive Officer
35
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes Oxley Act
I, Dean J. Brydon, certify that:
1. I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are likely
to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 5, 2008
/s/ Dean J. Brydon
----------------------------
Dean J. Brydon
Chief Financial Officer
36
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 March
31, 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: May 5, 2008
37