Business context and reporting period
Timberland Bancorp, Inc. is a Washington bank holding company operating primarily through Timberland Bank, a community bank serving six western Washington counties. This Form 10-K covers the fiscal year ended September 30, 2013; it is an annual report, not a standalone fourth-quarter filing. The bank’s lending is heavily real-estate-focused, with commercial real estate (CRE) its largest loan category.
Financial performance and condition
- FY2013 earnings: Net income was $4.76 million, up 3.6% from $4.59 million. Net income to common shareholders was $4.02 million; diluted EPS was $0.58, versus $0.52.
- Revenue and margins: Net interest income increased 0.5% to $25.80 million; net interest margin edged up to 3.82% from 3.81%. Non-interest income rose 4.9% to $10.26 million. Non-interest expense increased 1.2% to $25.86 million. Return on average assets was 0.64%.
- Credit costs: Provision for loan losses fell 16.4% to $2.93 million. Net charge-offs were $3.61 million, nearly unchanged year over year. The allowance was $11.14 million, equal to 1.99% of loans and 79.28% of non-performing loans.
- Cash flow: Operating cash flow was $11.57 million; investing activities used $17.53 million and financing activities provided $3.79 million. Cash and cash equivalents declined $2.17 million to $94.50 million.
- Balance sheet and funding: Total assets were $745.65 million, deposits $608.26 million, and shareholders’ equity $89.69 million. FHLB advances were $45.0 million. The bank reported $52.7 million of unused FRB borrowing capacity and a 19.17% regulatory liquidity ratio. Deposits increased 1.7%; non-interest-bearing, NOW, savings and money-market accounts comprised $434.1 million.
- Capital: Timberland Bank was categorized as well capitalized. Its Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 11.1%, 14.8% and 16.1%, respectively.
- Fourth quarter: For the quarter ended September 30, 2013, net income was $895,000, net income to common shareholders was $697,000, and diluted EPS was $0.10. The provision for loan losses was $165,000.
Material changes versus the prior comparable period
- Non-performing loans fell to $14.05 million from $22.53 million; non-performing assets declined to $27.95 million from $38.27 million, or 3.75% of assets versus 5.19%.
- Loans receivable, net, rose 1.8% to $548.10 million. CRE loans increased $35.0 million, while land loans decreased $8.5 million and construction loans declined overall, including an $18.0 million reduction in commercial construction.
- Deposits increased $10.34 million, led by growth in money-market and non-interest-bearing accounts; certificates of deposit declined $31.3 million.
- Net interest income rose modestly as lower funding costs more than offset lower asset yields. The yield on interest-earning assets declined to 4.48% from 4.69%, while the average cost of interest-bearing liabilities fell to 0.79% from 1.04%.
- OREO and other repossessed assets declined to $11.72 million from $13.30 million, but related expense increased to $2.59 million, including $2.06 million of valuation write-downs.
Outlook, commentary, risks and unusual items
- Management emphasized resolving problem assets, limiting speculative construction and land lending, growing core retail deposits, maintaining liquidity, and continuing residential mortgage sales. No specific earnings or revenue guidance is provided.
- Credit quality improved, but exposure remains concentrated: CRE was 50.3% of total loans; real-estate-secured loans were 95.9% of loans including undisbursed construction proceeds. Performing troubled debt restructurings were $18.57 million; total TDRs were $22.60 million. Potential problem loans were $37.1 million.
- Interest-rate sensitivity modeling estimated that a 200-basis-point rise would increase projected net interest income by about 5.3%, while a 100-basis-point decline would reduce it about 3.5%. These are model estimates, not forecasts, and actual results may differ.
- The Bank and Company regulatory memoranda of understanding were rescinded in December 2012 and January 2013, respectively. The Company repurchased $4.32 million of preferred stock during FY2013. After year-end, the board approved redemption of the remaining 12,065 Series A preferred shares, subject to regulatory approval. The preferred dividend rate was scheduled to rise from 5% to 9% after December 23, 2013 if not redeemed.
- The Company resumed common dividends in FY2013, paying $0.09 per share; future dividends remain subject to board discretion, earnings, capital and regulatory limits. The Treasury’s warrant for up to 370,899 common shares was sold to private investors and remains potentially dilutive.
- Other notable items included a $475,000 MSR valuation recovery, a $47,000 net OTTI charge on mortgage-backed securities, and a $236,000 tax provision increase related to an expired capital-loss carryforward. Goodwill was not impaired. Management reported effective internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether regulatory approval was obtained and the remaining Series A preferred shares were redeemed, and the resulting effect on earnings, capital and common shareholders.
- Whether declines in non-performing loans and OREO persist, and whether the allowance remains adequate relative to CRE concentration, TDRs and potential problem loans.
- How CRE and other real-estate loan concentrations, collateral values and local economic conditions affect future credit losses.
- Whether deposit growth and funding costs hold up as certificates mature and market interest rates change; confirm actual liquidity and borrowing capacity.
- Whether mortgage-sale volumes, MSR valuations and the outstanding warrant materially affect future non-interest income and per-share results.