Timberland Bancorp, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; comparative results are for the same periods in 2014. Balance-sheet comparisons are against September 30, 2014. Unaudited consolidated results reflect Timberland Bank, a community bank operating in western Washington.
Financial performance and condition
Amounts below are in millions, except per-share data and ratios.
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Net interest income | $6.98; up 8.6% year over year | $20.25; up 4.8% |
| Net interest margin | 3.88%, versus 3.86% | 3.81%, versus 3.83% |
| Net income | $2.16, versus $1.43 | $5.34, versus $4.20 |
| Diluted earnings per share | $0.31, versus $0.20 | $0.76, versus $0.57 |
| Non-interest income | $2.52, up 19.2% | $6.86, up 8.5% |
| Non-interest expense | $6.22, down 3.3% | $19.15, down 1.4% |
| Efficiency ratio | 65.43%, versus 75.21% | 70.62%, versus 75.27% |
| Return on average assets | 1.11%, versus 0.79% | 0.93%, versus 0.76% |
| Return on average equity | 10.03%, versus 7.12% | 8.40%, versus 6.76% |
- Balance sheet: Total assets were $789.79 million, up 5.9% from September 30, 2014. Net loans were $598.21 million, up 5.7%; deposits were $654.72 million, up 6.4%; and shareholders’ equity was $87.29 million, up 5.5%.
- Funding and debt: FHLB advances remained $45.00 million. Cash and cash equivalents were $76.17 million; cash plus investment CDs totaled $123.23 million, up 13.9% from fiscal year-end.
- Cash flow, nine months: Operating activities provided $4.49 million, compared with $6.23 million in 2014. Investing activities used $39.16 million, principally reflecting loan growth and increased investment CDs; financing activities provided $38.49 million, principally from a $39.60 million increase in deposits. Cash and cash equivalents increased $3.82 million.
- Credit and assets: Allowance for loan losses was $10.47 million, or 1.72% of loans receivable and loans held for sale, and 109% of non-performing loans. Non-performing assets were $18.66 million, or 2.36% of assets, down from $21.91 million and 2.94% at September 30, 2014. Non-accrual and 90-days-past-due loans were 1.58% of loans, versus 2.03%.
- Capital and liquidity: The Bank was categorized as well capitalized. Its actual ratios were 10.44% leverage, 13.32% CET1 and Tier 1 risk-based, and 14.57% total risk-based capital. The regulatory liquidity ratio was 18.63%. The Bank reported $207.57 million of available additional FHLB borrowing capacity, $46.08 million available from the Federal Reserve, and a $10 million PCBB line with no outstanding balance.
Material changes and management commentary
- Quarterly and year-to-date earnings improved, driven primarily by higher net interest income and non-interest income, alongside lower non-interest expense. In the nine-month comparison, 2014 common earnings also included $206,000 of preferred dividends and discount accretion; the preferred stock had been fully redeemed in December 2013.
- Net interest income benefited from growth in average interest-earning assets and lower funding costs. However, nine-month net interest margin edged down year over year as asset yields declined. Collection of $159,000 in non-accrual interest in the quarter and $284,000 year to date supported reported interest income; management said the quarter’s collection increased margin by about nine basis points.
- Loan originations rose 64.9% to $206.83 million for the nine months. Construction and land-development loans increased $41.20 million from fiscal year-end, primarily from multifamily and commercial real-estate construction lending. This raises the importance of monitoring construction and real-estate exposure.
- Loan-loss provision was zero in both comparative periods. The nine-month period had $40,000 in net recoveries, versus $573,000 in net charge-offs in 2014. Management considered the allowance adequate but cautioned that estimates may prove incorrect and regulators may require additional reserves.
- Non-interest income growth included higher gains on loan sales and debit-card interchange fees. Expense reductions included a $299,000 gain on sale of excess land near the Lacey branch. ATM/debit processing expense increased, including higher debit-card fraud-related costs.
- OREO and other repossessed assets declined to $8.06 million after property dispositions and write-downs; the company reported 33 properties and one other repossessed asset at June 30. Goodwill of $5.65 million was not impaired in the annual test performed during the quarter, though management noted the test depends on judgmental assumptions.
- No earnings or balance-sheet guidance was provided. Management said it expected sufficient funds to meet current loan commitments. Commitments were $66.04 million, with $57.67 million in undisbursed construction loans; CDs maturing within one year totaled $97.34 million.
Risks, contingencies, and other disclosures
- Key disclosed risks include deterioration in housing or commercial real estate, credit losses and allowance adequacy, interest-rate and margin changes, deposit retention and competition, loan-sale market conditions, regulatory actions and capital requirements, operating costs, cybersecurity and third-party service-provider risks, litigation, and valuation estimates.
- Commercial real-estate and construction lending expanded. Construction and land-development loans totaled $109.68 million at June 30, including growth in commercial real-estate and multifamily construction categories.
- Troubled debt restructurings included $13.75 million in impaired loans, of which $12.39 million were accruing and $1.36 million non-accrual. The company reported no commitments to lend additional funds on these restructured loans.
- Unrealized securities losses were attributed primarily to interest rates and market spreads; management said it intended and was able to hold the affected securities until recovery. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the stronger earnings persist after accounting for the quarter’s non-accrual interest collections and the one-time $299,000 property-sale gain.
- Credit performance and allowance coverage as construction, land-development, and commercial real-estate lending grows; review delinquencies, non-accrual loans, OREO, and restructured loans.
- Deposit retention and liquidity as $97.34 million of CDs mature within a year, and the availability and collateral constraints on borrowing lines.
- Net interest margin sensitivity to interest rates, asset yields, funding costs, and the mix of loan and deposit growth.
- Whether capital remains comfortably above regulatory thresholds as new capital rules and the capital conservation buffer phase in.