Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparative income-statement period is the three months ended December 31, 2015. Balance-sheet comparisons are to September 30, 2016. Financial statements are unaudited. Timberland Bancorp is a community-banking holding company operating Timberland Bank in western Washington.
Key financial results
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter / comparison |
|---|---|---|
| Net interest income | $8.31 million | $7.71 million; up 7.8% |
| Net interest margin | 3.91% | 4.00% |
| Non-interest income | $3.22 million | $2.52 million; up 27.7% |
| Non-interest expense | $6.81 million | $6.48 million; up 5.1% |
| Net income | $3.15 million | $2.53 million; up 24.5% |
| Diluted earnings per share | $0.43 | $0.36 |
| Return on average assets / equity | 1.39% / 12.87% | 1.22% / 11.26% |
| Efficiency ratio | 59.07% | 63.35% |
| Dividend per common share | $0.09 | $0.12 |
Total interest and dividend income rose 5.4% to $9.16 million. Loan-sale gains increased to $689,000 from $394,000 and helped lift non-interest income. The effective federal tax rate was 33.31%, versus 32.57%.
Financial position, liquidity and credit
- Assets and funding: Total assets were $923.75 million, up 3.6% from September 30. Deposits rose 3.7% to $789.98 million, while shareholders’ equity increased 2.9% to $99.63 million.
- Loans and cash: Net loans were $669.14 million, up 0.9%. Cash and cash equivalents were $135.47 million; cash, cash equivalents and investment CDs totaled $188.90 million.
- Cash flows: Operating activities provided $5.88 million; investing activities used $7.34 million; financing activities provided $27.99 million, mainly reflecting deposit growth. Cash and cash equivalents increased $26.53 million during the quarter.
- Debt and liquidity: FHLB borrowings were unchanged at $30.00 million. Two $15 million advances mature in August and September 2017 and bear rates of 4.27% and 3.69%. The regulatory liquidity ratio was 22.89%. The filing reports $243.07 million of additional FHLB borrowing availability and $59.93 million available from the Federal Reserve Bank, subject to collateral and facility terms.
- Capital: The Bank was classified as well-capitalized. Its leverage, common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 10.32%, 14.72%, 14.72% and 15.97%, respectively.
- Asset quality: Non-performing assets declined to $6.43 million from $7.86 million; the ratio to assets improved to 0.70% from 0.88%. Non-accrual loans were $2.36 million. The allowance for loan losses was $9.84 million, or 1.45% of loans receivable. No loan-loss provision was recorded in either comparative quarter; management reported a $17,000 net recovery in the current quarter.
Material changes and management commentary
- Net income growth reflected higher net interest income and non-interest income, partly offset by increased operating expenses. Net interest margin declined year over year, chiefly because non-accrual interest collections were much lower: $21,000 versus $475,000.
- Management attributed lower interest expense partly to a $15 million FHLB advance prepaid on September 30, 2016. The remaining $30 million in advances were expected to mature in August and September 2017, which management said should significantly reduce interest expense.
- Loan originations increased 67.7% to $90.15 million. Loan sales increased 91.8% to $24.20 million, primarily as completed one- to four-family construction loans were converted to permanent financing and sold.
- OREO and repossessed assets fell to $3.25 million after four properties were disposed of. Commercial real estate was the largest loan category, at 44.0% of total loans receivable.
- Management said available funds were expected to cover current loan commitments of $76.18 million and construction-loan disbursements in process of $54.16 million. CDs maturing within one year totaled $82.78 million.
- No specific earnings or growth guidance was provided. The filing cautions that quarterly results are not necessarily indicative of the full fiscal year and identifies risks including credit losses, local economic and real-estate conditions, interest-rate changes, funding competition, regulatory actions, loan-sale market conditions, technology and cybersecurity, and execution of business strategies.
Unusual items and contingencies
- On January 31, 2017, after quarter-end, the outstanding warrant was exercised: 370,899 shares were issued for $2.50 million. The warrant exercise price was $6.73 per share.
- Checking-account service-charge growth was partly associated with businesses in Washington’s marijuana industry; the company stated that handling such accounts was permissible in Washington under applicable federal regulatory guidelines.
- Management considered investment-security unrealized losses temporary and reported no new other-than-temporary impairment during the quarter. It cited interest rates and market spreads as the primary causes.
- The company reported no material legal proceedings, no material change in previously disclosed risk factors, and no material change in market-risk disclosures. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan growth—particularly commercial real estate and construction lending—remains consistent with underwriting standards, and whether delinquencies, non-accrual loans and the allowance remain adequate as conditions change.
- Whether the decline in net interest margin and comparatively low non-accrual interest collections persist, and the actual cost and timing of replacing or repaying the two 2017-maturing FHLB advances.
- Whether deposit growth and reported borrowing capacity remain available under actual collateral, funding and market conditions, including the $82.78 million in CDs scheduled to mature within one year.
- The share-count and capital effects of the January 2017 warrant exercise, and the sustainability of loan-sale gains, expense growth and the reduced quarterly dividend.