ITEM 1. BUSINESS - -----------------
GENERAL
Timberland Bancorp, Inc. ("Company"), a Washington corporation, was organized on September 8, 1997 for the purpose of becoming the holding company for Timberland Savings Bank, SSB ("Bank") upon the Bank's conversion from a Washington-chartered mutual to a Washington-chartered stock savings bank ("Conversion"). The Conversion was completed on January 12, 1998 through the sale and issuance of 6,612,500 shares of common stock by the Company. At September 30, 2001, the Company had total assets of $386.3 million, total deposits of $242.4 million and total shareholders' equity of $71.8 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary.
The Bank was established in 1915 as "Southwest Washington Savings and Loan Association." In 1935, the Bank converted from a state-chartered mutual savings and loan association to a federally chartered mutual savings and loan association, and in 1972, changed its name to "Timberland Federal Savings and Loan Association." In 1990, the Bank converted to a federally chartered mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991, the Bank converted to a Washington-chartered mutual savings bank and changed its name to "Timberland Savings Bank, SSB." On December 29, 2000, the Bank changed its name to "Timberland Bank." The Bank's deposits are insured by the FDIC up to applicable legal limits under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks ("Division") and the FDIC.
The Bank is a community oriented bank which has traditionally offered a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage loans. Lending activities have been focused primarily on the origination of loans secured by one- to- four family residential dwellings, including an emphasis on construction and land development loans, as well as the origination of multi-family and commercial real estate loans. The Bank actively originates adjustable rate residential mortgage loans that do not qualify for sale in the secondary market under Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. The Bank also originates commercial business loans and in 1998 established a business banking division to increase the origination of these loans.
MARKET AREA
The Bank considers Grays Harbor, Thurston, Pierce, King and Kitsap Counties as its primary market areas. The Bank conducts operations from its main office in Hoquiam (Grays Harbor County), three branch offices in Grays Harbor County (Aberdeen, Montesano and Ocean Shores), a branch office in King County (Auburn, opened in 1994), four branch offices in Pierce County (Edgewood, opened in 1980, Puyallup, opened in 1996, Spanaway, opened in 1999, and Tacoma, opened in 2001), three branch offices in Thurston County (Lacey, opened in 1997, Yelm, opened in 1999, and Tumwater opened in 2001), and a branch office in Kitsap County (Poulsbo opened in 1999). See "Item 2.
ITEM 2. PROPERTIES - -------------------
The Bank operates 13 full-service facilities. The Bank owns all of its offices, except for the Tacoma office, which is leased. In March 2001, the Bank opened a full-service branch in Tumwater (Thurston County), Washington and in June 2001, the Bank opened a full-service branch in Tacoma (Pierce County), Washington.
The following table sets forth certain information regarding the Bank's offices at September 30, 2001, all of which are owned, except for the Tacoma office, which is leased.
Approximate Location Year Opened Square Footage Deposits - -------- ----------- -------------- -------- (In thousands) Main Office:
624 Simpson Avenue 1966 7,700 $ 63,887 Hoquiam, Washington 98550
Branch Offices:
300 N. Boone Street 1974 3,400 26,746 Aberdeen, Washington 98520
314 Main South 1975 2,800 33,806 Montesano, Washington 98563
361 Damon Road 1977 2,100 22,215 Ocean Shores, Washington 98569
2418 Meridian East 1980 2,400 36,493 Edgewood, Washington 98371
202 Auburn Way South 1994 4,200 15,570 Auburn, Washington 98002
12814 Meridian East (South Hill) 1996 4,200 13,607 Puyallup, Washington 98373
1201 Marvin Road, N.E. 1997 4,400 10,051 Lacey, Washington 98516
101 Yelm Avenue W. 1999 1,800 5,131 Yelm, Washington 98597
20464 Viking Way NW 1999 3,380 3,751 Poulsbo, Washington 98370
2419 224th Street E. 1999 3,865 6,029 Spanaway, Washington 98387
801 Trosper Road SW Tumwater, Washington 98512 2001 3,300 3,923
7805 South Hosmer Street Tacoma, Washington 98408 2001 5,000 1,163
Data Center:
422 6th Street 1990 2,700 Hoquiam, Washington 98550
The Bank also operates 16 proprietary ATMs that are part of a nationwide cash exchange network.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - --------------------------
Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Bank.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - --------------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market under the symbol "TSBK". As of September 30, 2001, there were 4,570,995 shares of common stock issued and approximately 780 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers. Dividend payments by the Company are dependent primarily on dividends received by the Company from the Bank. Under federal regulations, the dollar amount of dividends the Bank may pay is dependent upon its capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the FDIC regulations. However, institutions that have converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the mutual to stock conversion.
The following table sets forth the market price range of the Company's common stock for the years ended September 30, 2001, 2000 and 1999. This information was provided by the Nasdaq Stock Market.
High Low Dividends ---- --- --------- Fiscal 2001 ----------- First Quarter $13.25 $ 11.19 $0.10 Second Quarter 14.63 12.38 0.10 Third Quarter 16.31 13.25 0.10 Fourth Quarter 16.22 13.75 0.11
Fiscal 2000 ----------- First Quarter $12.06 $10.75 $0.08 Second Quarter 11.25 9.81 0.08 Third Quarter 10.88 9.06 0.09 Fourth Quarter 12.56 10.31 0.10
Fiscal 1999 ----------- First Quarter $14.38 $10.00 $0.06 Second Quarter 13.00 11.41 0.06 Third Quarter 12.06 10.69 0.07 Fourth Quarter 13.25 11.44 0.08
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company and subsidiaries at and for the dates indicated. Since the Company had not commenced operations prior to the Bank's mutual-to-stock conversion in January 1998, the financial information presented for the periods prior to 1998 is that of the Bank only. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiary presented herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto. Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Annual Report contain certain "forward-looking statements" concerning the future operations of Timberland Bancorp, Inc. Management 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 the Company of the protections of such safe harbor with respect to all "forward-looking statements" contained in our Annual Report. We have used "forward-looking statements" to describe future plans and strategies, including our expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole, the ability of the Company to control costs and expenses, the ability of the Company to efficiently incorporate acquisitions into its operations, competitive products and pricing, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the "forward- looking statements," and undue reliance should not be placed on such statements.
OPERATING STRATEGY
The Bank is a community-oriented bank which has traditionally offered a wide variety of savings products to its retail customers while concentrating its lending activities on real estate loans. The primary elements of the Bank's operating strategy include:
EMPHASIZE RESIDENTIAL MORTGAGE LENDING AND RESIDENTIAL CONSTRUCTION LENDING. The Bank has attempted to establish itself as a niche lender in its primary market areas by focusing its lending activities primarily on the origination of loans secured by one- to- four family residential dwellings, including an emphasis on loans for the construction of residential dwellings. In an effort to meet the credit needs of borrowers in its primary area, the Bank actively originates one- to- four family mortgage loans that do not qualify for sale in the secondary market under FHLMC guidelines. The Bank also originates loans secured by multi-family and commercial real estate properties and, to a lesser extent, originates consumer loans. The Bank has also been an active participant in the secondary market, originating residential loans for sale to the FHLMC on a servicing retained basis. The Bank also established a business banking division in July 1998 to increase the Bank's origination of commercial business loans.
DIVERSIFY PRIMARY MARKET AREA BY EXPANDING BRANCH OFFICE NETWORK. In an effort to lessen its dependence on the Grays Harbor County market whose economy has historically been tied to the timber and fishing industries, the Bank has opened branch offices in Pierce, King, Thurston and Kitsap Counties. Thurston, Pierce, King and Kitsap Counties contain the Olympia, Bremerton, and Seattle-Tacoma metropolitan areas and their economies are more diversified with the presence of government, aerospace and computer industries.
LIMIT EXPOSURE TO INTEREST RATE RISK. In recent years, the loans that the Bank has retained in its portfolio generally have periodic interest rate adjustment features or have been relatively short-term in nature. Loans originated for portfolio retention primarily have included ARM loans and short-term construction loans. Longer fixed-rate mortgage loans have generally been originated for sale in the secondary market. Management believes that the interest rate sensitivity of these adjustable rate and short-term loans more closely match the interest rate sensitivity of the Bank's funding sources than do other longer duration assets with fixed interest rates.
MARKET RISK AND ASSET AND LIABILITY MANAGEMENT
GENERAL. Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investment, deposit and borrowing activities. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Bank's financial condition and results of operations. The Bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities or derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.
QUALITATIVE ASPECTS OF MARKET RISK. The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Bank's interest-earning assets by retaining in its portfolio, short-term loans and loans with interest rates subject to periodic adjustments. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms of up to six years.
The Bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve originating ARM loans for its portfolio; maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to- four family residential mortgage loans; matching asset and liability maturities; investing in short-term securities; originating fixed-rate loans for retention or sale in the secondary market and retaining the related loan servicing rights.
Sharp increases or decreases in interest rates may adversely affect the Bank's earnings. However, based on a rate shock analysis prepared by the FHLB of Seattle, an increase in interest rates of up to 300 basis points would increase the Bank's projected net interest income, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period. Similarly, further decreases in interest rates would negatively affect net interest income, as repricing would have the opposite effect. Management has sought to sustain the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, the Bank actively originates adjustable rate loans for retention in its loan portfolio. Fixed-rate mortgage loans generally are originated for the immediate or future resale in the secondary mortgage market. At September 30, 2001, adjustable rate mortgage loans and adjustable rate mortgage-backed securities constituted $184.7 million or 47.5%, of the Bank's total combined mortgage loan and mortgage-backed securities portfolio. Although the Bank has sought to originate ARM loans, the ability to originate such loans depends to a great extent on market interest rates and borrowers' preferences. Particularly in lower interest rate environments, borrowers often prefer to obtain fixed rate loans.
Consumer loans and construction and land development loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Bank's exposure to fluctuations in interest rates. At September 30, 2001, the construction and land development, and consumer loan portfolios amounted to $106.2 million and $17.9 million, or 28.7% and 4.8% of total loans receivable (including loans held for sale), respectively.
QUANTITATIVE ASPECTS OF MARKET RISK. Management of the Bank monitors the Bank's interest rate sensitivity through the use of a model provided for the Bank by the FHLB of Seattle. The model estimates the changes in NPV (net portfolio value) and net interest income in response to a range of assumed changes in market interest rates. The model first estimates the level of the Bank's NPV (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment. In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The model then recalculates
the Bank's NPV under different interest rate scenarios. The change in NPV under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk. The following table is provided by the FHLB of Seattle based on data at September 30, 2001.
Projected Net Interest Income Current Market Value Interest -------------------------------- ------------------------------ Rate Estimated $ Change % Change Estimated $ Change % Change Scenario Value from Base from Base Value from Base from Base - --------- --------- --------- --------- --------- --------- --------- (Dollars in thousands)
+300 $ 14,860 $ 716 5.06% $ 58,075 $ 2,145 3.84% +200 15,069 925 6.54 60,620 4,691 8.39 +100 15,172 1,028 7.27 62,607 6,678 11.94 BASE 14,144 -- -- 55,929 -- -- - -100 13,650 (494) (3.49) 52,367 (3,563) (6.37) - -200 12,904 (1,240) (8.77) 48,308 (7,622) (13.63) - -300 11,473 (2,671) (18.88) 47,795 (8,134) (14.54)
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit decay, and should not be relied upon as indicative of actual results. Furthermore, the computations do not reflect any actions management may undertake in response to changes in interest rates.
In the event of a 200 basis point decrease in interest rates, the Bank would be expected to experience a 13.6% decrease in NPV and a 8.8% decrease in net interest income. In the event of a 200 basis point increase in interest rates, an 8.4% increase in NPV and a 6.5% increase in net interest income would be expected. Based upon the modeling described above, the Bank's asset and liability structure generally results in decreases in NPV and decreases in net interest income in a declining interest rate scenario. This structure also generally results in increases in NPV and increases in net interest income in a rising interest rate environment.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could possibly deviate significantly from those assumed in calculating the table.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND 2000
TOTAL ASSETS: Total assets increased to $386.3 million at September 30, 2001 from $368.1 million at September 30, 2000, with the increase primarily reflected in a $10.8 million increase in loans receivable, a $5.1 million increase in investments and mortgage backed securities, and a $2.0 million increase in premises and equipment.
CASH AND DUE FROM FINANCIAL INSTITUTIONS: Cash and due from financial institutions and interest-bearing deposit balances in banks increased to $13.4 million at September 30, 2001 from $12.0 million at September 30, 2000.
INVESTMENTS, MORTGAGE-BACKED SECURITIES AND FHLB STOCK: Investments, mortgage-backed securities and FHLB stock increased to $34.2 million at September 30, 2001 from $29.1 million at September 30, 2000. The increase is primarily a result of the purchase of $10.0 million in mortgage-backed securities in connection with the Bank's asset liability management strategies, and was partially offset by redemptions to fund share repurchases, and scheduled amortization and prepayments. During the year, the Bank converted $11.9 million in fixed rate loans held for sale to mortgage-backed securities. These newly created securities were then sold and the proceeds were used to purchase other mortgage-backed securities with shorter maturities. For additional details on investments and mortgage-backed
securities, see Note 2 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."
LOANS RECEIVABLE AND LOANS HELD FOR SALE, NET OF ALLOWANCE FOR LOAN LOSSES: Net loans receivable, including loans held-for-sale, increased 3.4% to $323.8 million at September 30, 2001 from $313.0 at September 30, 2000. This increase is primarily a result of $9.3 million increase in net construction loans, a $7.1 million increase in commercial real estate loans, and a $2.3 million increase in commercial business loans. These increases are partially offset by a $6.7 million decrease in one-to-four family mortgage loans as the Company sold $27.6 million in fixed rate mortgage loans during the year and converted $11.9 million in fixed rate mortgages to mortgage backed securities during the year.
REAL ESTATE OWNED, NET: Real Estate Owned, net, decreased to $1.0 million at September 30, 2001 from $2.0 million at September 30, 2000. This balance decreased primarily due to the sale of the Bank's largest REO, a convenience store with retail space in Kitsap County, Washington. For additional information see "Item 1, Business - - Lending Activities -- Nonperforming Assets" and Note 6 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."
DEPOSITS: Deposits increased by 14.0% to $242.4 million at September 30, 2001 from $212.6 million at September 30, 2000, with the Bank's certificate of deposit accounts, checking accounts, passbook savings accounts, and money market accounts all indicating increases from September 30, 2000 totals.
BORROWINGS: Borrowings decreased by 15.0% to $69.0 million at September 30, 2001 from $81.1 million at September 30, 2000, as funds from increased deposits were used to pay down the level of FHLB advances.
SHAREHOLDERS' EQUITY: Total shareholders' equity decreased by $503,000 to $71.8 million at September 30, 2001 from $72.3 million at September 30, 2000. The components of shareholders' equity were affected by the repurchase of 428,827 shares of the Company's stock for $5.9 million, net income of $5.5 million, the payment of $1.9 million in dividends to shareholders, and a $580,000 increase (net of tax) in the fair value of investments available for sale. Also affecting shareholders' equity was a $529,000 increase in the equity component related to the unearned shares issued to the Employee Stock Ownership Trust and a net reduction of $753,000 in the equity components related to unearned shares issued to the Management Recognition and Development Plan.
On September 24, 2001 the Company announced a plan to repurchase 200,872 shares of the Company's stock. This marked the Company's ninth 5% stock repurchase plan. As of September 30, 2001, the Company had repurchased 44,000 of these shares. The Company has repurchased a total of 2,248,032 (34.0%) of the 6,612,500 shares that were issued when the Company went public in January 1998.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND 1999
TOTAL ASSETS: Total assets increased 19.9% to $368.1 million at September 30, 2000 from $307.1 million at September 30, 1999. The increase was concentrated on loans receivable and loans held for sale, which grew $56.9 million, primarily funded by increased Federal Home Loan Bank ("FHLB") borrowings and increased deposits. Asset growth was partially offset by the use of $4.6 million to repurchase shares of the Company's stock.
CASH AND DUE FROM FINANCIAL INSTITUTIONS: Cash and due from financial institutions and interest-bearing deposit balances in banks increased to $12.0 million at September 30, 2000 from $8.1 million at September 30, 1999.
INVESTMENTS, MORTGAGE-BACKED SECURITIES AND FHLB STOCK: Investments, mortgage-backed securities and FHLB stock decreased 8.2% to $29.1 million at September 30, 2000 from $31.7 million at September 30, 1999, primarily as a result of redemptions to fund share repurchases and scheduled amortization and prepayments. For additional details on investments and mortgage-backed securities see Note 2 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."
LOANS RECEIVABLE, AND LOANS HELD-FOR-SALE, NET OF ALLOWANCE FOR LOAN LOSSES: Loans receivable, including loans held-for-sale, net, increased 22.2% to $313.0 million at September 30, 2000 from $256.1 million at September 30,
1999. This increase is primarily centered in one-to-four family mortgage loans, multi-family mortgage loans, commercial mortgage loans and land loans held in the Bank's portfolio.
REAL ESTATE OWNED, NET: Real estate owned, net, increased to $2.0 million at September 30, 2000 from $867,000 at September 30, 1999. This balance increased as the Bank foreclosed on a convenience store (with retail space) and was the successful bidder on the property at a sheriff's sale in January 2000. The property is classified as REO with a balance of $1.3 million at September 30, 2000. For additional information see "Item 1, Business -- Lending Activities -- Nonperforming Assets" and Note 6 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."
DEPOSITS: Deposits increased 13.0% to $212.6 million at September 30, 2000 from $188.1 million at September 30, 1999, primarily due to growth of $15.6 million in the Bank's certificate of deposit accounts and smaller increases in the non-interest bearing accounts, N.O.W. checking accounts and money market accounts.
BORROWINGS: Borrowings increased 80.0% to $81.1 million at September 30, 2000 from $45.1 million at September 30, 1999, due to increased FHLB advances, which were primarily used to fund loan portfolio growth.
SHAREHOLDERS' EQUITY: Total shareholders' equity increased to $72.3 million at September 30, 2000 from $72.2 million at September 30, 1999, primarily as a result of net income of $5.9 million, a $528,000 reduction in the equity component related to the unearned shares issued to the Employee Stock Ownership Trust, and an $87,000 decrease in Accumulated Other Comprehensive Loss category. These increases to shareholder's equity were partially offset by the repurchase of 424,127 shares of the Company's stock for $4.6 million and the payment of $1.7 million in dividends to shareholders.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED SEPTEMBER 30, 2001 AND 2000
NET INCOME: Net income for the year ended September 30, 2001 was $5.5 million, or $1.28 per diluted share ($1.30 per basic share) compared to $5.9 million, or $1.31 per diluted share ($1.31 per basic share) for the year ended September 30, 2000. Income for the year ended September 30, 2001 was increased by a $205,000 ($135,000 after income tax) gain on sale of securities, a $175,000 ($116,000 after income tax) market value recovery on loans held for sale, and a $150,000 ($99,000 after income tax) recovery of a kiting-related NSF expense. Income for the year ended September 30, 2001 was reduced by a $770,000 ($508,000 after income tax) expense related to the initial vesting of MRDP shares, $356,000 ($235,000 after income tax) in REO market value writedowns, and a $515,000 ($340,000 after income tax) increase in loan loss provisions. Income for the year ended September 30, 2000 was increased by a $408,000 ($269,000 after income tax) market value recovery on loans held for sale and the recovery of $290,000 ($191,000 after income tax) of delinquent interest and fees on a non-performing asset and reduced by a $150,000 ($99,000 after income tax) kiting related NSF expense. Net income per share for the year ended September 30, 2001 was increased by $0.05 (basic) and $0.05 (diluted) as a result of the Company's repurchase of its common shares during the year.
NET INTEREST INCOME: Net interest income increased 11.5% to $17.8 million for the year ended September 30, 2001 from $15.9 million for the year ended September 30, 2000, primarily due to the Bank's larger loan portfolio. Total interest income increased $3.3 million to $31.7 million for the year ended September 30, 2001 from $28.4 million for the year ended September 30, 2000. The increase in net interest income was primarily a result of increased interest income from the Bank's larger loan portfolio as average loan balances increased to $323.9 million for the year ended September 30, 2001 from $289.4 million for the year ended September 30, 2000. The increased interest income was partially offset by a $1.5 million increase in interest expense, primarily due to increased deposits and increased average FHLB advances. The net interest margin increased to 4.99% for the year ended September 30, 2001 from 4.95% for the year ended September 30, 2000.
PROVISION FOR LOAN LOSSES: The provision for loan losses for the year ended September 30, 2001 was $1.4 million compared to $885,000 for the twelve months ended September 30, 2000. Management deemed the allowance for loan losses of $3.1 million at September 30, 2001 (0.93% of loans receivable and loans held for sale and 74.6% of
non-performing loans) adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. For the twelve months ended September 30, 2001 and 2000, net charge-offs were $990,000 and $301,000, respectively. For additional information, see "Item 1, Business -- Lending Activities - - Allowance for Loan Losses" included herein.
NON-INTEREST INCOME: Noninterest income increased $1.2 million to $2.9 million, for the year ended September 30, 2001 from $1.7 million for the year ended September 30, 2000. The increase was primarily due to a $533,000 increase in service charge on deposits, a $264,000 increase in gain on sale of loans, a $227,000 net increase in gain on sales of securities, a $154,000 increase in servicing income on loans sold and a $129,000 increase in ATM fees. These increases are partially offset by a $233,000 net reduction in market value recoveries on loans held for sale.
NON-INTEREST EXPENSE: Total non-interest expense increased to $11.1 million for the year ended September 30, 2001 from $8.0 million for the year ended September 30, 2000. This increase is primarily due to a $1.5 million increase in salary and employee benefits (of which $770,000 related to the MRDP plan implemented in 2001), a $561,000 increase in advertising expense largely related to the Bank's checking account acquisition program, a $348,000 increase in REO related expenses, and a $248,000 increase in premises and equipment expenses. Partially offsetting these expense increases was a $150,000 recovery in June 2001 of a kiting-related NSF expense that the Company incurred during the year ended September 30, 2000.
PROVISION FOR INCOME TAXES: The provision for income taxes decreased to $2.7 million for the year ended September 30, 2001 from $2.9 million for the year ended September 30, 2000 primarily as a result of lower income before income taxes. The effective rate was 33.4% for the year ended September 30, 2001 and 33.2% for the year ended September 30, 2000.
COMPARISON OF OPERATING RESULTS FOR YEARS ENDED SEPTEMBER 30, 2000 AND 1999
NET INCOME: Net income increased to $5.9 million or $1.31 per basic share ($1.31 per diluted share) for the year ended September 30, 2000 from net income of $5.2 million or $1.03 per basic share ($1.03 per diluted share) for the year ended September 30, 1999. Income for the year ended September 30, 2000 was increased by a $408,000 ($269,000 after income tax) market value recovery on loans held for sale and the receipt of $290,000 ($191,000 after income tax) of delinquent interest and fee income on a large non-performing asset. Also affecting net income for the current year was a $522,000 ($345,000 after income tax) increase in the provision for loan losses (compared to the same period in 1999) primarily due to loan portfolio growth. Income for the year ending September 30, 1999 was reduced by market value writedowns on loans held for sale of $583,000 ($385,000 after income tax), and was partially offset by the recognition of $442,000 ($292,000 after income tax) of delinquent interest and fee income on two large non-performing loans. Net income per share for the year ended September 30, 2000 was increased by $0.07 as a result of the Company's repurchase of its common shares during the year.
NET INTEREST INCOME: Net interest income increased 8.1% to $15.9 million for the year ended September 30, 2000 from $14.7 million for the year ended September 30, 1999. Interest income for the twelve months ended September 30, 2000 and September 30, 1999 included $281,000 and $442,000 of delinquent interest received on large non-performing loans, respectively. The increase in net interest income was primarily a result of increased interest income from the Bank's larger loan portfolio. Average loan balances increased to $289.4 million for the twelve months ended September 30, 2000 from $223.7 million for the twelve months ended September 30, 1999. The increased interest income from the larger loan portfolio was partially offset by increased interest expense due to increased deposits and FHLB advances.
Net interest margin was 4.95% (or 4.86% without the $281,000 in delinquent interest received) for the year ended September 30, 2000 compared to a net interest margin of 5.56% (or 5.40% without the $442,000 in delinquent interest received) for the year ended September 30, 1999. The Company's lower net interest margin is primarily a result of the increased use of higher costing funds (FHLB advances and certificates of deposit) to support the Bank's loan growth. Also, the Company's net interest margin has been impacted by reduced earnings resulting from a smaller
investment portfolio, as a portion of the interest bearing investments has been used to fund the Company's stock repurchase program.
Interest expense increased 48.6% to $12.4 million for the year ended September 30, 2000 from $8.4 million at September 30, 1999, due to a $2.9 million increase in interest expense on deposits (resulting from both volume and average rate increases) and $3.0 million in increased interest related to borrowings primarily used to fund loan growth.
PROVISION FOR LOAN LOSSES: The provision for loan losses increased to $885,000 for the year ended September 30, 2000 from $363,000 for the year ended September 30, 1999. Management increased the provision for loan losses primarily due to growth in the Bank's loan portfolio. Management deemed the allowance for loan losses of $2.6 million at September 30, 2000 (0.84% of loans receivable and loans held for sale and 73.1% of non-performing loans) adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date.
Despite experiencing a higher percentage of non-performing loans than some peer group averages, the Company's actual net charge-offs continue to remain relatively small. For the year ended September 30, 2000 net charge- offs and transfers were $301,000. For additional information see "Item 1, Business -- Lending Activities --Allowance for Loan Losses."
NONINTEREST INCOME: Total noninterest income increased to $1.7 million for the year ended September 30, 2000 from $592,000 for the year ended September 30, 1999. This increase is primarily due to a combined change of $991,000 in the market value adjustments on loans held for sale as the Company had a $408,000 market value recovery for the year ended September 30, 2000 compared to a $583,000 market value writedown for the year ended September 20, 1999. Smaller increases in service charges on deposits, gains on sale of loans and other fees also contributed to the overall increase.
NONINTEREST EXPENSE: Total noninterest expense increased 11.3% to $8.0 million for the year ended September 30, 2000 from $7.2 million for the year ended September 30, 1999. The increase in noninterest expense is primarily due to a $289,000 increase in salary and employee benefit expense, a $103,000 increase in premises and equipment expense, a $90,000 increase in advertising expense, and an $88,000 increase in the cost of REO operations. The increase in noninterest expense was also in connection with the establishment of a $150,000 reserve associated with a check-kiting situation that resulted in a checking account overdraft, which was fully recovered in 2001.
PROVISION FOR INCOME TAXES: The provision for income taxes increased to $2.9 million for the year ended September 30, 2000 from $2.6 million for the year ended September 30, 1999 primarily as a result of higher income before income taxes. The effective tax rate in both years was 33.2%.
NONPERFORMING ASSETS
Information with respect to the Bank's nonperforming assets at September 30, 2001 and September 30, 2000 is contained in "Item 1, Business -- Lending Activities -- Nonperforming Assets and Delinquencies."
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios.
The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average weekly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from weekly balances. Management does not believe that the use of weekly balances instead of daily balances has caused any material difference in the information presented.
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net interest income on the Company. Information is provided with respect to the (i) effects on interest income attributable to changes 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.
Year Ended September 30, Year Ended September 30, 2001 Compared to Year 2000 Compared to Year Ended September 30, 2000 Ended September 30, 1999 Increase (Decrease) Increase (Decrease) Due to Due to ------------------------ ------------------------ Net Net Rate Volume Change Rate Volume Change ---- ------ ------ ---- ------ ------ (In thousands)
Interest-earning assets: Loans receivable (1)..... $263 $3,189 $3,452 $(368) $5,972 $5,604 Investments and mortgage- backed securities....... (24) (197) (221) 55 (254) (199) FHLB stock and equity securities.............. (47) 125 78 77 (130) (53) Interest-bearing deposits................ (14) 35 21 27 (126) (99) ---- ------ ------ ----- ------ ------ Total net change in income on interest- earning assets........... 178 3,152 3,330 (209) 5,462 5,253
Interest-bearing liabilities: Passbook accounts........ (11) 44 33 (11) 10 (1) NOW accounts............. 24 158 182 -- 21 21 Money market accounts.... 11 54 65 27 86 113 Certificate accounts..... 204 614 818 156 828 984 FHLB advances and other borrowed money.......... (276) 675 399 185 2,762 2,947 ---- ------ ------ ----- ------ ------ Total net change in expense on interest- bearing liabilities...... (48) 1,545 1,497 357 3,707 4,064 ---- ------ ------ ----- ------ ------ Net change in net interest income.......... $226 $1,607 $1,833 $(566) $1,755 $1,189 ==== ====== ====== ===== ====== ====== - -------------- (1) Excludes interest on loans 90 days or more past due. Includes loans originated for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on and the sale of loans, maturing securities and FHLB advances. The Company also raised $65.0 million in net proceeds from the January 1998 stock offering. While the maturity and 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.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund 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 September 30, 2001, 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 22.9%. At September 30, 2001, the Bank also maintained
an uncommitted credit facility with the FHLB of Seattle that provided for immediately available advances up to an aggregate amount of $129.6 million, under which $69.0 million was outstanding.
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 and other short-term government and agency obligations. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral for repurchase agreements.
The Bank's primary investing activity is the origination of one- to- four family mortgage loans and construction and land development loans. During the years ended September 30, 2001, 2000, and 1999, the Bank originated $47.5 million, $34.2 million and $41.1 million of one- to- four family mortgage loans and $80.1 million, $69.6 million and $63.2 million of construction and land development loans, respectively. At September 30, 2001, the Bank had mortgage loan commitments totaling $17.8 million, standby letters of credit totaling $350,000, and undisbursed loans in process totaling $39.8 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2001 totaled $113.7 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.
Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. Under current FDIC regulations, insured state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%. At September 30, 2001, the Bank was in compliance with all applicable capital requirements. For additional details see the regulatory capital table in Note 18 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data" and "Item 1, Business -- Regulation of the Bank -- Capital Requirements."
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------------------------------------------------------------------
The information contained under "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk and Asset and Liability Management" of this Form 10-K is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page ----
Independent Auditor's Report 46 Consolidated Balance Sheets as of September 30, 2001 and 2000 47 Consolidated Statements of Income For the Years Ended September 30, 2001, 2000, and 1999 48 Consolidated Statements of Shareholders' Equity For the Years Ended September 30, 2001, 2000 and 1999 49 Consolidated Statements of Cash Flows For the Years Ended September 30, 2001, 2000 and 1999 50 Consolidated Statements of Comprehensive Income For the Years Ended September 30, 2001, 2000 and 1999 52 Notes to Consolidated Financial Statements 53
INDEPENDENT AUDITOR'S REPORT
The Board of Directors Timberland Bancorp, Inc. Hoquiam, Washington
We have audited the accompanying consolidated balance sheet of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 2001, and the related consolidated statements of income, shareholders' equity, cash flows and comprehensive income for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 2000 and for the years ended September 30, 2000 and 1999 were audited by Knight Vale & Gregory PLLC, independent accountants, whose members became partners of McGladrey & Pullen, LLP on September 1, 2001. Knight Vale & Gregory PLLC's report, dated November 2, 2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2001 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Timberland Bancorp, Inc. and Subsidiaries as of September 30, 2001, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
McGladrey & Pullen,LLP
/s/McGladrey & Pullen,LLP
October 31, 2001 Tacoma, Washington
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ (Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
2001 2000
ASSETS Cash and due from financial institutions $ 10,017 $ 8,893 Interest bearing deposits in banks 3,422 3,109 Investments and mortgage-backed securities (available for sale) 29,369 24,925 Federal Home Loan Bank stock (at cost) 4,830 4,150
Loans receivable, net 305,746 284,663 Loans held for sale 18,022 28,343 323,768 313,006
Accrued interest receivable 1,880 1,756 Premises and equipment 10,660 8,614 Real estate owned 1,006 1,966 Accrued interest receivable 1,880 1,756 Other assets 1,353 1,661
TOTAL ASSETS $386,305 $368,080
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES Deposits $242,372 $212,611 Federal Home Loan Bank advances 68,978 81,137 Other liabilities and accrued expenses 3,146 2,020 TOTAL LIABILITIES 314,496 295,768
SHAREHOLDERS' EQUITY Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $0.01 par value; 50,000,000 shares authorized; 2001 - 4,570,995 shares issued, 4,010,303 shares outstanding 2000 - 4,793,295 shares issued, 4,361,279 shares outstanding 46 48 Additional paid-in capital 39,574 42,250 Unearned shares issued to employee stock ownership trust (5,948) (6,477) Unearned shares issued to management recognition and & development plan (2,471) -- Retained earnings 40,332 36,795 Accumulated other comprehensive income (loss) 276 (304) TOTAL SHAREHOLDERS' EQUITY 71,809 72,312
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $386,305 $368,080
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------ (Dollars in Thousands, Except Per Share Amounts)
Timberland Bancorp, Inc. and Subsidiaries Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
INTEREST AND DIVIDEND INCOME Loans receivable $29,777 $26,325 $20,721 Investments and mortgage-backed securities 962 1,183 1,382 Dividends from investments 791 713 766 Interest bearing deposits in banks 162 141 240 TOTAL INTEREST AND DIVIDEND INCOME 31,692 28,362 23,109
INTEREST EXPENSE Deposits 9,491 8,393 7,276 Federal Home Loan Bank advances 4,433 4,034 1,087 TOTAL INTEREST EXPENSE 13,924 12,427 8,363
NET INTEREST INCOME 17,768 15,935 14,746
PROVISION FOR LOAN LOSSES 1,400 885 363
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,368 15,050 14,383
NON-INTEREST INCOME Service charges on deposits 1,040 507 440 Gain on sale of loans, net 367 103 74 Market value adjustment on loans held for sale 175 408 (583) Gain (loss) on sale of securities available for sale, net 205 (22) -- Escrow fees 205 198 240 Servicing income (expenses) on loans sold 152 (2) (17) ATM transaction fees 379 250 156 Other 404 296 282 TOTAL NON-INTEREST INCOME 2,927 1,738 592
NON-INTEREST EXPENSE Salaries and employee benefits 6,042 4,535 4,246 Premises and equipment 1,208 960 856 Advertising 950 389 299 Loss from real estate operations and write-downs 481 134 45 Other 2,411 1,948 1,714 TOTAL NON-INTEREST EXPENSE 11,092 7,966 7,160
INCOME BEFORE FEDERAL INCOME TAXES 8,203 8,822 7,815
FEDERAL INCOME TAXES 2,741 2,925 2,597
NET INCOME $ 5,462 $ 5,897 $ 5,218
EARNINGS PER COMMON SHARE Basic $1.30 $1.31 $1.03 Diluted 1.28 1.31 1.03
See notes to consolidated financial statements.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------ (Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,462 $ 5,897 $ 5,218 Noncash revenues, expenses, gains and losses included in net income: Depreciation 527 424 364 Deferred federal income taxes (207) (231) (449) Earned ESOP shares 503 434 428 Earned MRDP Shares 776 -- -- Federal Home Loan Bank stock dividends (310) (224) (134) Market value adjustment on loans held for sale (175) (408) 583 Loss on sale of real estate owned, net 21 25 -- (Gain) loss on sale of securities available for sale (205) 22 -- Gain on sale of loans (367) (103) (74) Provision for loan and real estate owned losses 1,756 936 391 Net increase (decrease) in loans originated for sale (1,063) (5,169) (14,783) Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses 1,167 (89) 1,339 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,885 1,514 (7,117)
CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest- bearing deposits in banks (313) (1,793) 13,429 Activity in securities available for sale: Sales 12,334 2,482 -- Maturities, prepayments and calls 10,549 2,421 29,889 Purchases (14,720) (1,989) (26,826) Increase in loans receivable, net (23,653) (54,139) (44,568) Additions to premises and equipment (2,573) (1,416) (2,664) Additions to real estate owned (198) (271) -- Proceeds from sale of real estate owned 2,035 1,109 1,498 Proceeds from sale of premises and equipment -- -- 20 NET CASH USED IN INVESTING ACTIVITIES (16,539) (53,596) (29,222)
CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits 29,761 24,463 17,314 Increase (decrease) in Federal Home Loan Bank advances (12,159) 36,053 33,466 Proceeds from exercise of stock options 19 -- -- Repurchase of common stock (5,918) (4,603) (13,150) Payment of dividends (1,925) (1,748) (1,520) Common stock purchased for ESOP -- -- -- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,778 54,165 36,110
NET INCREASE (DECREASE) IN CASH 1,124 2,083 (229)
CASH AND DUE FROM FINANCIAL INSTITUTIONS Beginning of year 8,893 6,810 7,039
END OF YEAR $10,017 $ 8,893 $ 6,810
(continued)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------ (concluded) (Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Income taxes paid $ 2,260 $ 3,195 $2,975 Interest paid 14,024 12,151 8,171
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES Market value adjustment of securities held for sale, net of tax $ 580 $ 87 ($511) Loans transferred to real estate owned 1,254 2,013 581 Shares issued to management recognition and development plan 3,224 -- -- Investment securities acquired in loan securitization 11,926 -- --
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - ------------------------------------------------------------------------------ (Dollars in Thousands)
Timberland Bancorp, Inc. and Subsidiaries Years Ended September 30, 2001, 2000 and 1999
2001 2000 1999
COMPREHENSIVE INCOME Net income $5,462 $5,897 $5,218 Change in fair value of unrealized gains (losses) securities available for sale, net of tax 580 87 (511)
TOTAL COMPREHENSIVE INCOME $6,042 $5,984 $4,707
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Timberland Bancorp, Inc. (the Company); its wholly owned subsidiary, Timberland Bank (the Bank); and the Bank's wholly owned subsidiary, Timberland Service Corp. All significant intercompany transactions and balances have been eliminated.
NATURE OF OPERATIONS
The Company is a holding company which operates primarily through its subsidiary, the Bank. The Bank was established in 1915 and, through its thirteen branches located in Grays Harbor, Pierce, Thurston, Kitsap and King Counties in Washington State, attracts deposits from the general public, and uses those funds, along with other borrowings, to provide primarily real estate loans to borrowers in western Washington, and to invest in investment securities and mortgage-backed securities.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices within the banking industry. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the balance sheet, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate owned and deferred tax assets.
Certain prior year amounts have been reclassified to conform to the 2001 presentation.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest rates, prepayment rates, need for liquidity, and changes in the availability of and the yield of alternative investments, are considered securities available for sale, and are reported at fair value. Fair value is determined using published quotes as of the close of business on reporting dates. Unrealized gains and losses are excluded from earnings, and are reported as a separate component of shareholders' equity, net of the related deferred tax effect, entitled "Accumulated other comprehensive income (loss)." Realized gains and losses on securities available for sale, determined using the specific identification method, are included in earnings. Amortization of premiums and accretion of discounts are recognized in interest income over the period to maturity.
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost or estimated market value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains or losses on sales of loans are recognized at the time of sale. The gain or loss is determined by the difference between the net sales proceeds and the recorded value of the loans, including any remaining unamortized deferred loan fees.
LOANS RECEIVABLE
Loans are stated at the amount of unpaid principal, reduced by the undisbursed portion of loans in process, unearned income and an allowance for loan losses.
ALLOWANCES FOR LOSSES
Allowances for losses on specific problem loans and real estate owned are charged to earnings when it is determined that the value of these loans and properties, in the judgment of management, is impaired. In addition to specific reserves, the Bank also maintains general provisions for loan losses based on evaluating known and inherent risks in the loan portfolio, including management's continuing analysis of the factors and trends underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The ultimate recovery of loans is susceptible to future market factors beyond the Bank's control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements.
The Bank accounts for impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118. These statements address the disclosure requirements and allocation of the allowance for loan losses for certain impaired loans. A loan within the scope of these statements is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. The Bank excludes smaller balance homogenous loans, including single-family residential and consumer loans, from the scope of these statements.
When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, impairment is measured at current fair value of the collateral, reduced by estimated selling costs. When the measurement of the impaired loan is less than the recorded investment in the loan, including accrued interest and net unamortized deferred loan fees or costs, loan impairment is recognized by establishing or adjusting an allocation of the allowance for loan losses. SFAS No. 114, as amended, does not change the timing of charge-offs of loans to reflect the amount ultimately expected to be collected.
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTEREST ON LOANS AND LOAN FEES
Interest on loans is recorded as income when borrowers' monthly payments become due. Allowances are established for uncollected interest on loans for which the interest is determined to be uncollectible. Generally, all loans past due 90 days or morethree or more payments are placed on nonaccrual status and internally classified as substandard. Any interest income recorded in the current reporting period is fully reserved. Subsequent collections are applied proportionately to past due principal and interest. Loans are removed from nonaccrual status only when the loan is deemed current, and the collectibility of principal and interest is no longer doubtful.
The Bank charges fees for originating loans. These fees, net of certain loan origination costs are deferred and amortized to income, on the level-yield basis, over the loan term. If the loan is repaid prior to maturity, the remaining unamortized deferred loan fee is recognized in income at the time of repayment.
LOAN SERVICING RIGHTS
Loan servicing rights are capitalized when acquired through the origination of loans that are subsequently sold or securitized with the servicing rights retained. The value of loan servicing rights 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 future cash flows from the servicing assets to those estimated at the time servicing assets were originated. Loan servicing rights are amortized as an offset to service fees in proportion to and over the period of estimated net servicing income.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125. This statement revised the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures; however, it carries over most of SFAS No. 125's provisions without reconsideration. The standards addressed in this statement are based on consistent application of a financial components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes The Bank records its mortgage servicing rights at fair value in accordance with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which requires the Bank to allocate the total cost of all mortgage loans, whether originated or purchased, to the loans (without the mortgage servicing rights), and to mortgage servicing rights based on their relative fair values. The Bank is amortizing the mortgage servicing assets, which totaled $508,000 and $356,000 at September 30, 2001 and 2000, respectively, over the period of the estimated servicing income. liabilities when extinguished. This statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. The adoption of this statement affects the disclosures in these financial statements; however, the adoption of this statement did not have a material impact on the Company's financial position of results of operations for the year ended September 30, 2001.
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost. Depreciation is computed on the straight-line method over the following estimated useful lives: buildings and improvements up to forty years - thirty to forty years; furniture and equipment - three to seven years; automobile - five years. The cost of maintenance and repairs is charged to expense as incurred. Gains and losses on dispositions are reflected in earnings.
REAL ESTATE OWNED
Real estate owned (REO) consists of properties acquired through or in lieu of foreclosure, recorded initially at the lower of cost or fair value of the properties less estimated costs of disposal. Costs relating to development and improvement of the properties are capitalized; costs relating to holding the properties are expensed.
Valuations are periodically performed by management, and an allowance for losses is established by a charge to earnings if the recorded value of a property exceeds its estimated net realizable value.
INCOME TAXES
The Company files a consolidated federal income tax return with its subsidiaryies. Prior to fiscal year 1997, the Bank qualified under provisions of the Internal Revenue Code which permitted, as a deduction from taxable income, an allowance for bad debts based on a percentage of taxable income.
In 1996, the percentage-of-income bad debt deduction for federal tax purposes was eliminated. In addition, federal tax bad debt reserves which had been accumulated since October 1, 1988, that exceeded the reserves which would have been accumulated based on actual experience, are subject to recapture over a six-year recapture period. As of September 30, 2001, the Bank's federal tax bad debt reserves subject to recapture approximated $900,000.
Deferred federal income taxes result from temporary differences between the tax basis of assets and liabilities, and their reported amounts in the consolidated financial statements. These will result in differences between income for tax purposes and income for financial reporting purposes in future years. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank sponsors a leveraged Employee Stock Ownership Plan (ESOP). The ESOP is accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plan. Accordingly, the debt of the ESOP is recorded as other borrowed funds of the Bank, and the shares pledged as collateral are reported as unearned shares issued to the employee stock ownership trust on the consolidated balance sheets. The debt of the ESOP is with the Company and is thereby eliminated in the consolidated financial statements. As shares are released from collateral, compensation expense is recorded equal to the average market price of the shares for the period, and the shares become outstanding for earnings per share calculations. Cash dividends on unallocated shares which are collateral for debt are used to reduce scheduled principal and interest payments, and are recorded as a reduction of compensation expense.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheet caption "Cash and due from financial institutions" to be cash equivalents.
STOCK-BASED COMPENSATION
The Company accounts for stock-optionsbased awards to employees using the intrinsic value method, in accordance with APB No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized in the financial statements for employee stock optionsarrangements. However, the required pro forma disclosures of the effects of all options granted have been provided in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Company's stock option and management recognition and development plans. In 2000 and 1999, the effect of the Company's stock options on earnings per share was antidilutive and, thus, basic and diluted earnings per share are the same.
NOTE 2 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum reserve balances on hard or on deposit with the Federal Reserve Bank. The amount of such balances for year ended September 30, 2001 was approximately $926,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 3 - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and mortgage-backed securities have been classified according to management's intent (dollars in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE
AVAILABLE FOR SALE
SEPTEMBER 30, 2001 U.S. agency securities $ -- $ -- $ -- $ -- Mortgage-backed securities 18,755 420 (16) 19,159 Municipal bonds 55 2 -- 57 Mutual funds 10,020 40 -- 10,060 FHLB stock 4,830 -- -- 4,830 Equity securities 121 -- (28) 93
TOTAL $28,951 $462 ($44) $29,369
SEPTEMBER 30, 2000 U.S. agency securities $ 6,502 $ -- ($ 86) $ 6,416 Mortgage-backed securities 11,846 2 (279) 11,569 Municipal bonds 73 (2) 71 Mutual funds 6,641 -- (169) 6,472 FHLB stock 4,150 -- -- 4,150 Equity securities 323 116 (42) 397
TOTAL $25,385 $118 ($578) $24,925
Mortgage-backed securities pledged as collateral for public fund deposits and federal treasury tax and loan deposits totaled $2,437,000 and $2,459,000 at September 30, 2001 and 2000, respectively.
The contractual maturities of debt securities available for sale at September 30, 2001 are as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
AMORTIZED FAIR COST VALUE
Due within one year $ -- $ -- Due from one year to five years 55 57 Due from five to ten years 6,138 6,318 Due after ten years 12,617 12,841
TOTAL $18,810 $19,216
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 4 - LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable and loans held for sale consisted of the following at September 30 (dollars in thousands):
2001 2000
Mortgage loans: One- to four-family $112,060 $108,307 Multi-family 29,412 33,604 Commercial 65,731 58,632 Construction and land development 106,244 89,903 Land 13,632 12,561 TOTAL MORTGAGE LOANS 327,079 303,007
Consumer loans: Home equity and second mortgage 11,039 9,816 Other 6,825 6,081 TOTAL CONSUMER LOANS 17,864 15,897
Commercial business loans 7,150 4,808
TOTAL LOANS RECEIVABLE 352,093 323,712
Less: Undisbursed portion of loans in process 39,803 32,831 Deferred loan origination fees and other 3,494 3,578 Allowance for loan losses 3,050 2,640 46,347 39,049
LOANS RECEIVABLE, NET 305,746 284,663
Loans held for sale (one- to four-family) 18,022 28,518 Market value adjustment -- (175) LOANS HELD FOR SALE, NET 18,022 28,343
TOTAL LOANS RECEIVABLE AND LOANS HELD FOR SALE $323,768 $313,006
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 4 - LOANS RECEIVABLE AND LOANS HELD FOR SALE (continued)
The weighted average interest rate on all loans at September 30, 2001 and 2000 was 8.46% and 8.64%, respectively.
Loans serviced for the Federal Home Loan Mortgage Corporation and others at September 30, 2001 and 2000 were $90,303,000 and $68,849,000, respectively.
Certain related parties of the Bank, principally Bank directors and officers, were loan customers of the Bank in the ordinary course of business during 2001 and 2000. Activity in related party loans during the years ended September 30 is as follows (dollars in thousands):
2001 2000
Balance, beginning of year $807 $774 New loans 374 63 Repayments (388) (30)
BALANCE, END OF YEAR $793 $807
At September 30, 2001 and 2000, the Bank had non-accruing loans totaling approximately $4,091,000 and $3,612,000, respectively. At September 30, 2001 and September 30, 2000 no loans were 90 days or more past due and still accruing interest. No interest income was recorded on non-accrual loans for the years ended September 30, 2001, 2000 and 1999. The average investment in non-accrual loans for the years ended September 30, 2001, 2000 and 1999 was $3,778,000, $3,460,000 and $3,565,000, respectively.
An analysis of the allowance for loan losses for the years ended September 30 follows (dollars in thousands):
2001 2000 1999
Balance, beginning of year $2,640 $2,056 $1,728 Provision for loan losses 1,400 885 363
Loans charged off (1,012) (563) (35) Recoveries 22 262 - -
NET CHARGE-OFFS (990) (301) (35)
BALANCE, END OF YEAR $3,050 $2,640 $2,056
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 4 - LOANS RECEIVABLE AND LOANS HELD FOR SALE (concluded)
Following is a summary of information relating to impaired loans as of September 30 (dollars in thousands):
2001 2000
Impaired loans without a valuation allowance $2,300 $3,612 Impaired loans with a valuation allowance 1,791 --
$4,091 $3,612
Valuation allowance related to impaired loans $270 $--
NOTE 5 - LOAN SERVICING
Loans serviced for the Federal Home Loan Mortgage Corporation and others are not included in the consolidated balance sheets. The principal amounts of those loans at September 30, 2001 and 2000 were $90,303,000 and $68,849,000, respectively.
Following is an analysis of the changes in mortgage servicing rights at September 30 (dollars in thousands):
2001 2000 1999
Balance, at beginning of year $356 $358 $375 Additions 300 87 100 Amortization (148) (89) (117)
BALANCE, END OF YEAR $508 $356 $358
In June 2001, the Bank securitized and sold approximately $11.9 million in first mortgage loans. In the securitization, the Bank retained servicing responsibilities, but has no other retained interest in the loans sold. (see Note 25)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at September 30 (dollars in thousands):
2001 2000
Land $ 2,654 $ 2,303 Buildings and improvements 7,675 6,271 Leasehold improvements 416 -- Furniture and equipment 3,223 2,294 Automobiles 19 19 Property held for future expansion 834 596 Construction and purchases in progress 158 536 14,563 12,019 Less accumulated depreciation 3,903 3,405
TOTAL PREMISES AND EQUIPMENT $10,660 $ 8,614
NOTE 7 - REAL ESTATE OWNED
Real estate owned consisted of the following at September 30 (dollars in thousands):
2001 2000
Real estate acquired through foreclosure $1,1434 $1,992 Allowance for possible losses (137) (26)
TOTAL REAL ESTATE OWNED $1,006 $1,966
An analysis of the allowance for possible losses follows (dollars in thousands):
2001 2000 1999
Balance, beginning of year $ 26 $38 $32 Provision for additional losses 356 51 28 Write-downs (245) (63) (22)
BALANCE, END OF YEAR $137 $26 $38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 8 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at September 30 (dollars in thousands):
2001 2000
Loans receivable $2,064 $1,976 Less reserve for uncollected interest 319 396 1,745 1,580 Investment securities and interest bearing deposits 135 176
TOTAL ACCRUED INTEREST RECEIVABLE $1,880 $1,756
NOTE 9 - DEPOSITS
Deposits consisted of the following at September 30 (dollars in thousands):
2001 2000
Non-interest bearing $ 16,976 $ 15,497 N.O.W. checking 30,626 24,467 Passbook savings 34,228 28,647 Money market accounts 27,251 20,863 Certificates of deposit 133,291 123,137
TOTAL DEPOSITS $242,372 $212,611
The weighted average interest rate on all deposits at September 30, 2001 and 2000 was 3.72% and 4.45%, respectively.
Time deposits of $100,000 or greater totaled $44,186,000 and $42,420,000 at September 30, 2001 and 2000, respectively.
Scheduled maturities of certificates of deposit at September 30, 2001 are as follows (dollars in thousands):
Within one year $113,735 Over one to two years 15,577 Over two to five years 3,128 After five years 851
TOTAL $133,291
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 9 - DEPOSITS (concluded)
Interest expense by account type is as follows for the years ended September 30 (dollars in thousands):
2001 2000 1999
Certificates of deposit $7,396 $6,573 $5,590 Money market accounts 921 741 628 Passbook savings 728 694 695 N.O.W. checking 446 385 363
TOTAL $9,491 $8,393 $7,276
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
The Bank currently has an Advance, Security and Deposit Agreement with Federal Home Loan Bank that is maintained at 35% of the Bank's total assets ($134,068,000 at September 30, 2001). The Bank had advances at September 30, 2001 as follows (dollars in thousands):
WEIGHTED AVERAGE INTEREST RATE AMOUNT Maturities in years ending September 30: 2002 Fixed rate set maturity 3.92% $12,500 2002 Fixed rate monthly amortization 6.11 196 2002 Variable rate set maturity 3.51 3,300 2004 Fixed rate set maturity 5.58 5,000 2005 Fixed rate set maturity 5.49 2,000 2006 Fixed rate set maturity putable 5.98 10,000 2006 Fixed rate set maturity 6.55 982 2008 Fixed rate set maturity putable 6.18 15,000 2011 Fixed rate set maturity putable 4.77 20,000
$68,978
Under the Advances, Security and Deposit Agreement, virtually all of the Bank's assets, not otherwise encumbered, are pledged as collateral for advances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 11 - OTHER LIABILITIES AND ACCRUED EXPENSES
Other liabilities and accrued expenses comprise the following at September 30 (dollars in thousands):
2001 2000
Federal income taxes $ 425 $ -- Accrued pension and profit sharing payable 807 768 Accrued interest payable on deposits and FHLB advances 491 557 Accounts payable and accrued expenses - other 1,423 695
TOTAL OTHER LIABILITIES AND ACCRUED EXPENSES $3,146 $2,020
NOTE 12 - FEDERAL INCOME TAXES
The Bank previously qualified under provisions of the Internal Revenue Code that permitted federal income taxes to be computed after a deduction for additions to bad debt reserves. Accordingly, retained earnings include approximately $2,200,000 for which no provision for federal income taxes has been made. If in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes at the current applicable rates would be imposed.
The components of the provision for income taxes at September 30 are as follows (dollars in thousands):
2000 1999 1999
Current $2,948 $3,156 $3,046 Deferred benefit (207) (231) (449)
TOTAL FEDERAL INCOME TAXES $2,741 $2,925 $2,597
The components of the Company's deferred tax assets and liabilities at September 30 are as follows (dollars in thousands):
2001 2000 DEFERRED TAX ASSETS Accrued interest on loans $ 64 $ 110 Accrued vacation 59 50 Deferred compensation 106 105 Unearned ESOP shares 270 239 Allowance for loan losses 888 573 Loans held for sale market value adjustment -- 63 Unrealized securities losses -- 1567 Unearned MRRDP shares 37 -- Other -- 2 TOTAL DEFERRED TAX ASSETS 1,424 1,2969
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 12 - FEDERAL INCOME TAXES (concluded)
2001 2000
DEFERRED TAX LIABILITIES FHLB stock dividends $ 576 $ 501 Real estate sale, installment basis 30 33 Unrealized securities gains 142 - - Other 379 325 TOTAL DEFERRED TAX LIABILITIES 785 566
NET DEFERRED TAX ASSETS $ 639 $ 730
The provision for federal income taxes differs from that computed at the statutory corporate tax rate as follows (dollars in thousands):
2001 2000 1999 AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Taxes at statutory rate $2,789 34.0% $2,999 34.0% $2,657 34.0% Other - net (487) (.6) (74) (.8) (60) (.8)
FEDERAL INCOME TAXES $2,741 33.4% $2,925 33.2% $2,597 33.2%
NOTE 13 - PROFIT SHARING PLANS
The Bank maintains a tax-qualified profit sharing plan for the benefit of all eligible employees who are at least 21 years of age and work a minimum of 501 hours. The Bank contributed $362,000, $300,000 and $249,000 to the plan for the years ended September 30, 2001, 2000 and 1999, respectively. Contributions are made on a discretionary basis.
In addition, the Bank has an employee bonus plan based on net income. Bonuses accrued for the years ended September 30, 2001, 2000 and 1999 totaled $208,000, $229,000 and $195,000, respectively.
NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN
In 1998, the Bank established an Employee Stock Ownership Plan (ESOP) that benefits all employees with at least one year of service who are 21 years of age or older. The ESOP is funded by Bank contributions in cash or stock. Employee vesting occurs over six years. The amount of the annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt. All dividends received by the ESOP are used to pay debt service.
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN (concluded)
In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase 529,000 shares of common stock of the Company. The loan will be repaid primarily from the Company's contributions to the ESOP over 15 years. The interest rate on the loan is 8.5%. As of September 30, 2001, 2,522 shares had been distributed out of the ESOP to participants. The balance of the loan at September 30, 2001 was $6,743,000.
Shares held by the ESOP as of September 30 were classified as follows:
2001 2000 1999
Unallocated shares 396,750 432,016 467,283
Shares released for allocation 129,722 96,143 61,717
TOTAL ESOP SHARES 526,472 528,159 529,000
The approximate fair market value of the Bank's unallocated shares at September 30, 2001, and 2000 and 1999, respectively, is $5,872,000, and $5,184,000 and $5,344,000. Compensation expense recognized under the ESOP was $273,000, $199,000 and $285,000 for the years ended September 30, 2001, 2000 and 1999, respectively.
NOTE 15 - STOCK OPTIONS
During the year ended September 30, 1999, the Company adopted a stock-based option plan, which is described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for this plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards granted under this plan, consistent with the method of SFAS No. 123, the Company's net income and earnings per share for the years ended September 30 would have been reduced to these pro forma amounts (dollars in thousands):
2001 2000 1999
Net income: As reported $5,462 $5,897 $5,218 Pro forma 5,264 5,589 4,901
Earnings per basic share: As reported $1.30 $1.31 $1.03 Pro forma 1.26 1.23 .96
Earnings per diluted share: As reported $1.28 $1.31 $1.03 Pro forma 1.25 1.23 .96
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 15 - STOCK OPTIONS (continued)
Under the Company's stock option plan, the Company may grant options for up to 661,250 shares of its common stock to certain key employees and directors. The exercise price of each option equals the fair market value of the Company's stock on the date of grant. An option's maximum term is ten years. Options are exercisable on a cumulative basis in annual installments of 10% on each of the ten anniversaries from the date of grant. Vesting will be accelerated to 20% per year if certain criteria relating to Company performance are met. At September 30, 2001, options for 50,417 shares are available for future grant under this plan.
The fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions.
RISK FREE EXPECTED EXPECTED INTEREST RATE LIFE (YEARS) DIVIDENDS
Fiscal 2001 5.3% 8.0 2.80% Fiscal 1999 6.0 10.0 2.25
Stock option activity is summarized in the following table:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE
Outstanding October 1, 1998 -- $ -- Grants 582,494 12.02 OUTSTANDING SEPTEMBER 30, 1999 582,494 12.02 Forfeited (10,000) 12.38 OUTSTANDING SEPTEMBER 30, 2000 572,494 12.01 Grants 38,339 14.35 Options exercised (1,600) 12.00
OUTSTANDING SEPTEMBER 30, 2001 609,233 $12.16
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 15 - STOCK OPTIONS (concluded)
Additional information regarding options outstanding as of September 30, 2001 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------- --------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL NUMBER EXERCISE NUMBER EXERCISE PRICE LIFE (YEARS) OUTSTANDING PRICE EXERCISABLE PRICE
$12.00 6.5 553,394 $12.00 237,401 $12.00 12.06 to 12.38 7.7 22,500 12.31 7,000 12.38 13.59 to 14.50 9.6 33,339 14.70 -- --
7.0 609,233 $12.16 244,401 $12.01
NOTE 16 - DEFERRED COMPENSATION/NON-COMPETITION AGREEMENT AND SEVERANCE COMPENSATION AGREEMENT
The Bank has a deferred compensation/noncompetition arrangement with its chief executive officer which will provide monthly payments of $2,000 per month upon retirement. Once payments have commenced, they will continue until his death, at which time, payments will continue to his surviving spouse until her death or for 60 months. The present value of the payments, based on the life expectancy of the chief executive officer, has been accrued based on a retirement age of 65 and is included in other liabilities in the consolidated financial statements. As of September 30, 2001 and 2000, $239,000, has been accrued under the agreement.
In connection with the January 1998 conversion, the Bank adopted an Employee Severance Compensation Plan, which expires in ten years, to provide benefits to eligible employees in the event of a change in control of the Company or the Bank (as defined in the plan). In general, all employees with two or more years of service will be eligible to participate in the plan. Under the plan, in the event of a change in control of the Company or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service with the Bank. The maximum payment for any eligible employee would be equal to 24 months of their current compensation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 17 - MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN
On November 10, 1998, the Board of Directors adopted a Management Recognition and Development Plan (MRDP). On January 25, 1999, shareholders approved the adoption of the MRDP for the benefit of officers, employees and non-employee directors of the Company. The objective of the MRDP is to retain personnel of experience and ability in key positions by providing them with a proprietary interest in the Company.
The Plan allows for the issuance to participants of up to 264,500 shares of the Company's common stock. purchase, in the open market or through the issuance of Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. On July 26, 2001, the Company awarded 204,927 shares under the Plan to employees and directors. Awards under the MRDP were 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 will be recognized over a five year vesting period, with 20% vesting immediately upon grant. Compensation expense of $770,000 for the year ended September 30, 2001 was recognized.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. A summary of the Bank's commitments at September 30 is as follows (dollars in thousands):
2001 2000
Commitments to extend credit $17,807 $17,322 Standby letters of credit 350 100
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.
Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the financial position of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 19 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios as defined in the regulations (set forth in the table below) of Tier 1 capital to average assets, and minimum ratios of Tier 1 and total capital to risk-weighted assets.
As of September 30, 2001, the most recent notification from the Bank's regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts (dollars in thousands) and ratios are also presented in the table.
TO BE WELL CAPITALIZED UNDER PROMPT CAPITAL ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
SEPTEMBER 30, 2001 Tier 1 capital (to average assets): Consolidated $71,482 18.8% $15,218 4.0% N/A N/A Timberland Bank 61,930 16.5 15,038 4.0 $18,798 5.0% Tier 1 capital (to risk-weighted assets): Consolidated 71,482 26.2 10,915 4.0 N/A N/A Timberland Bank 61,930 22.7 10,907 4.0 16,361 6.0 Total capital (to risk-weighted assets): Consolidated 74,532 27.3 21,830 8.0 N/A N/A Timberland Bank 64,980 23.8 21,814 8.0 27,678 10.0
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 19 - REGULATORY MATTERS (concluded)
TO BE WELL CAPITALIZED UNDER PROMPT CAPITAL ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
SEPTEMBER 30, 2000 Tier 1 capital (to average assets): Consolidated $72,516 20.0% $14,334 4.0% N/A N/A Timberland Bank 58,470 16.6 14,068 4.0 $17,585 5.0% Tier 1 capital (to risk-weighted assets): Consolidated 72,516 26.7 10,857 4.0 N/A N/A Timberland Bank 58,470 21.7 10,765 4.0 16,148 6.0 Total capital (to risk-weighted assets): Consolidated 75,156 27.7 21,714 8.0 N/A N/A Timberland Bank 61,110 22.7 21,530 8.0 26,913 10.0
RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.
At the time of conversion of the Bank from a Washington-charted mutual savings bank to a Washington-chartered stock savings bank, the Bank established a liquidation account in an amount equal to its retained earnings of $23,866,000 as of June 30, 1997, the date of the latest statement of financial condition used in the final conversion prospectus. The liquidation account will be maintained for the benefit of eligible withdrawable account holders who have maintained their deposit accounts in the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank (and only in such an event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. The Bank may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - SEPTEMBER 30 (Dollars in Thousands)
2001 2000
ASSETS Cash and due from financial institutions $ 24 $ 14 Interest bearing deposits 227 1,140 Investments and mortgage-backed securities available for sale 3,837 5,712 Loan receivable from Bank 6,743 7,089 Investment in Bank 62,270 58,337 OTHER ASSETS 26 53
TOTAL ASSETS $ 73,127 $ 72,345
LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities and accrued expenses $ 1,318 $ 33 Shareholders' equity 71,809 72,312
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 73,127 $ 72,345
CONDENSED STATEMENTS OF INCOME - YEARS ENDED SEPTEMBER 30 (Dollars in Thousands)
2001 2000 1999
OPERATING INCOME Interest on investments and mortgage- backed securities $ 107 $ 199 $ 287 Interest on loan receivable from Bank 592 621 645 Dividends on investments 180 235 352 Gain (loss) on sale of investment securities available for sale 227 (22) (1) Dividends from Timberland Bank 1,949 1,863 1,612 Other 1 2 -- TOTAL OPERATING INCOME 3,056 2,898 2,895
OPERATING EXPENSES 191 204 245
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF BANK 2,865 2,694 2,650
INCOME TAXES 238 220 304
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF BANK 2,627 2,474 2,346
EQUITY IN UNDISTRIBUTED INCOME OF BANK 2,835 3,423 2,872
NET INCOME $5,462 $5,897 $5,218
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 20 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED SEPTEMBER 30 (Dollars in Thousands)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES Net income $5,462 $5,897 $ 5,218 Adjustments to reconcile net income to net cash provided: Equity in undistributed income of Bank (2,835) (3,423) (2,872) ESOP shares earned 503 434 428 MRDP shares earned 776 -- -- (Gain) loss on sale of securities available for sale (227) 22 (1) Other, net 1,331 (37) 117 NET CASH PROVIDED BY OPERATING ACTIVITIES 5,010 2,893 2,890
CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest-bearing deposits in banks 913 (921) 6,685 Investment in Bank (485) 1,859 (429) Purchases of securities available for sale (2,500) (269) (12,575) Proceeds from maturities of securities available for sale 4,122 -- 17,809 Proceeds from sale of securities available for sale 430 2,482 -- Principal repayments on loan receivable from Bank 346 316 292 NET CASH PROVIDED BY INVESTING ACTIVITIES 2,826 3,467 11,782
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options the issuance of common stock, net of related costs 19 -- -- Repurchase of common stock (5,920) (4,603) (13,150) Payment of dividends (1,925) (1,748) (1,520) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,826) (6,351) (14,670)
NET INCREASE IN CASH 10 9 2
CASH AND DUE FROM FINANCIAL INSTITUTIONS Beginning of year 14 5 3
END OF YEAR $ 24 $ 14 $ 5
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 21 - EARNINGS PER SHARE DISCLOSURES
Basic earnings per share are computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted earnings per share are computed by dividing net income applicable to common stock 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 from assumed vesting of shares awarded but not released under the Company's Management Recognition and Development Plan. In accordance with Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans, issued by the American Institute of Certified Public Accountants, shares owned by the Bank's Employee Stock Ownership Plan that have not been allocated are not considered to be outstanding for the purpose of computing earnings per share. Information regarding the calculation of basic and diluted earnings per share for the years ended September 30, 2001 and 2000, respectively, is as follows (dollars in thousands, except per share amounts).
2001 2000 1999
BASIC EPS COMPUTATION
Numerator - net income $ 5,462 $ 5,897 $ 5,218
Denominator - weighted average common shares outstanding 4,193,314 4,508,427 5,089,414
Basic EPS $1.30 $1.31 $1.03
DILUTED EPS COMPUTATION
Numerator - net income $ 5,462 $ 5,897 $ 5,218
Denominator - weighted average common shares outstanding 4,193,314 4,508,427 5,089,414
Effect of dilutive stock options 79,299 -- --
Weighted average common shares outstanding-assuming dilution 4,727,613 4,508,427 5,089,414
Diluted EPS $1.28 $1.31 $1.03
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 22 - COMPREHENSIVE INCOME
Net unrealized gains and losses included in comprehensive income were computed as follows for the years ended September 30 (dollars in thousands):
TAX BEFORE-TAX (BENEFIT) NET-OF-TAX AMOUNT EXPENSE AMOUNT
Unrealized holding gains arising during the year $1,084 $369 $715 Reclassification adjustment for gains included in net income (205) (70) (135)
NET UNREALIZED GAINS $ 879 $299 $580
Unrealized holding gains arising during the year $ 111 $ 39 $ 72 Reclassification adjustment for losses included in net income 22 7 15
NET UNREALIZED GAINS $ 133 $ 46 $ 87
Unrealized holding losses arising during the year ($774) ($263) ($511) Reclassification adjustment for gains included in net income -- -- --
NET UNREALIZED LOSSES ($774) ($263) ($511)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 23 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of estimated fair values for financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. Major assumptions, methods and fair value estimates for the Company's significant financial instruments are set forth below:
CASH AND DUE FROM FINANCIAL INSTITUTIONS AND INTEREST BEARING DEPOSITS IN BANKS The recorded amount is a reasonable estimate of fair value.
INVESTMENTS, MORTGAGE-BACKED SECURITIES AND LOANS HELD FOR SALE The fair value of investments, mortgage-backed securities and loans held for sale has been based on quoted market prices or dealer quotes.
FEDERAL HOME LOAN BANK STOCK
The carrying values of stock holdings approximate fair value.
LOANS RECEIVABLE Fair values for loans are estimated for portfolios of loans with similar financial characteristics. Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Prepayments are based on the historical experience of the Bank.
DEPOSITS The fair value of deposits with no stated maturity date is included at the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered by the Bank for deposits of similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES The fair value of borrowed funds is estimated by discounting the future cash flows of the borrowings at a rate which approximates the current offering rate of the borrowings with a comparable remaining life.
ACCRUED INTEREST The carrying amounts of accrued interest approximate fair value.
(continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 23 - FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values of financial instruments at September 30, 2001 and 2000 were as follows (dollars in thousands):
2001 2000 RECORDED FAIR RECORDED FAIR AMOUNT VALUE AMOUNT VALUE
FINANCIAL ASSETS Cash and due from financial institutions and interest bearing deposits in banks $ 13,439 $ 13,439 $ 12,002 $ 12,002 Investments and mortgage-backed securities 29,369 29,369 24,925 24,925 Federal Home Loan Bank stock 4,830 4,830 4,150 4,150 Loans receivable 323,768 327,153 -- 13,006 313,604 Accrued interest receivable 1,880 1,880 1,756 1,756
FINANCIAL LIABILITIES Deposits $242,372 $243,368 $212,611 $213,234 Federal Home Loan Bank advances 68,978 78,405 81,137 80,712 Accrued interest payable 491 491 557 557
NOTE 24 - STOCK REPURCHASE PLAN
In September 2001, the Company initiated a stock repurchase plan for the purchase of 200,872 shares of stock which had not been completed as of September 30, 2001. As of September 30, 2001, 44,000 shares had been repurchased. The remainder is anticipated to be purchased during the year ending September 30, 2002.
NOTE 25 - SECURITIZATION OF MORTGAGE LOANS
In June 2001, the Bank securitized and sold approximately $11.9 million in first mortgage loans. Upon closing the transaction, the Bank sold the securities received, recognizing a loss of $22,000, and invested the majority of the proceeds in other investment securities. The Bank retained servicing responsibilities, but has no other interest in the loans sold. The Bank receives servicing fees of .25% of the outstanding principal balance of the loans sold. A servicing asset of $92,000 was recognized in this transaction, based on the following factors: estimated life of loans of 84 months and cash flow discount rate of 6.87%. Investors have no recourse to the Bank's other assets in the event debtors fail to pay the balance owned.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
Timberland Bancorp, Inc. and Subsidiaries September 30, 2001 and 2000
NOTE 26 - SUBSEQUENT EVENT
Subsequent to September 30On October 25, 2001, the Board of DirectorsCompany approved a dividend in the amount of $.11 per share to be paid on November 16, 2001 tofor shareholders of record as of November 2, 2001.
NOTE 27 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):
SEPTEM- DECEM- BER 30, JUNE 30, MARCH 31, BER 31, 2001 2001 2001 2000
Interest and dividend income $7,915 $7,977 $7,845 $7,955 Interest expense (3,237) (3,352) (3,519) (3,816) NET INTEREST INCOME 4,678 4,625 4,326 4,139
Provision for loan losses (250) (800) (200) (150) Noninterest income 664 857 798 608 Noninterest expense (3,543) (2,554) (2,703) (2,292)
INCOME BEFORE INCOME TAXES 1,549 2,128 2,221 2,305
Federal income taxes 522 721 734 764
NET INCOME $1,027 $1,407 $1,487 $1,541
Basic earnings per share $0.25 $0.34 $0.35 $0.35 Diluted earnings per share $0.24 $0.34 $0.35 $0.35
Interest and dividend income $7,551 $7,460 $6,796 $6,555 Interest expense (3,636) (3,213) (2,888) (2,690) NET INTEREST INCOME 3,915 4,247 3,908 3,865
Provision for loan losses (120) (410) (280) (75) Noninterest income 869 647 167 55 Noninterest expense (2,107) (1,965) (1,839) (2,055)
INCOME BEFORE INCOME TAXES 2,557 2,519 1,956 1,790
Federal income taxes 848 838 647 592
NET INCOME $1,709 $1,681 $1,309 $1,198
Basic and diluted earnings per share $.39 $.38 $.29 $.26
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors" is included in the Company's Definitive Proxy Statement for the 2002 Annual Meeting of Stockholders ("Proxy Statement") and is incorporated herein by reference.
The following table sets forth certain information with respect to the executive officers of the Company and the Bank. Each of the executive officers holds the same position with the Company and the Bank.
EXECUTIVE OFFICERS OF THE COMPANY AND BANK
Age at Position September -------------------------------------------------- Name 30, 2001 Company Bank - ---- -------- ------- ----
Clarence E. Hamre 67 Chairman of the Board, Chairman of the Board, President and Chief President and Chief Executive Officer Executive Officer Michael R. Sand 47 Executive Vice President Executive Vice President, and Secretary Secretary and Director Dean J. Brydon 34 Chief Financial Officer Chief Financial Officer
Biographical Information
CLARENCE E. HAMRE has served as the Bank's President and Chief Executive Officer since 1969.
MICHAEL R. SAND has been affiliated with the Bank since 1977 and has served as the Bank's Executive Vice President since 1986.
DEAN J. BRYDON has been affiliated with the Bank since 1994 and has served as the Chief Financial Officer since January 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ----------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors" is included in the Company's Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - --------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained under the section captioned "Security Ownership of Certain Beneficial Owners and Management" is included in the Company's Proxy Statement and is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the sections captioned "Security Ownership of Certain Beneficial Owners and Management" and "Proposal I -- Election of Directors" is included in the Company's Proxy Statement and are incorporated herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ----------------------------------------------------------
The information contained under the section captioned "Proposal I -- Election of Directors -- Transactions with Management" is included in the Company's Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant (1) 3.2 Bylaws of the Registrant (1) 10.1 Employee Severance Compensation Plan (2) 10.2 Employee Stock Ownership Plan (2) 10.3 1999 Stock Option Plan (3) 10.4 Management Recognition and Development Plan (3) 21 Subsidiaries of the Registrant 23 Consent of Accountants
- ------------- (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (333-35817). (2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997. (3) Incorporated by reference to the Registrant's 1999 Annual Meeting Proxy Statement dated December 15, 1998.
(b) Reports on Form 8-K
A Current Report Form 8-K was filed on September 7, 2001 in which the Company announced that the accounting firm of McGladrey & Pullen, LLP, had acquired the attest assets and practice of the Company's independent auditors, Knight Vale & Gregory PLLC effective September 1, 2001 and that Knight Vale & Gregory PLLC would no longer be the auditor for the Company. In addition, the Company indicated that on September 7, 2001, the Board of Directors, at the recommendation of its Audit Committee, engaged McGladrey & Pullen, LLP, as the Company's certifying accountants.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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: December 21, 2001 By: /s/Clarence E. Hamre ------------------------------------ Clarence E. Hamre Chairman of the Board, President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/Clarence E. Hamre Chairman of the Board, President, December 21, 2001 - -------------------- Chief Executive Officer and Director Clarence E. Hamre (Principal Executive Officer)
/s/Michael R. Sand Executive Vice President, Secretary December 21, 2001 - -------------------- and Director Michael R. Sand
/s/Dean J. Brydon Chief Financial Officer December 21, 2001 - -------------------- (Principal Financial and Accounting Dean J. Brydon Officer)
/s/Andrea M. Clinton - -------------------- Director December 21, 2001 Andrea M. Clinton
/s/Robert Backstrom Director December 21, 2001 - -------------------- Robert Backstrom
- -------------------- Director Richard R. Morris
/s/David A. Smith Director December 21, 2001 - -------------------- David A. Smith
/s/Peter J. Majar Director December 21, 2001 - -------------------- Peter J. Majar
/s/Jon C. Parker Director December 21, 2001 - -------------------- Jon C. Parker
/s/James C. Mason Director December 21, 2001 - -------------------- James C. Mason
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent - ------
Timberland Bancorp, Inc.
Percentage Jurisdiction or Subsidiaries of Ownership State of Incorporation - ------------ ------------ ----------------------
Timberland Bank 100% Washington
Timberland Service Corporation (1) 100% Washington
- ----------- (1) This corporation is a wholly owned subsidiary of Timberland Bank.
EXHIBIT 23
CONSENT OF ACCOUNTANTS
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Form 10-K of our report, dated October 31, 2001, on the consolidated financial statements of Timberland Bancorp and Subsidiaries.
/s/McGladrey & Pullen, LLP
Tacoma, Washington December 13, 2001