Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; comparative income and cash-flow figures are for the periods ended June 30, 2017. Balance-sheet comparisons are to September 30, 2017. Financial statements are unaudited.
Business context
Timberland Bancorp is the holding company for Timberland Bank, a community bank operating 22 branches in western Washington. Lending is concentrated in real estate, including commercial real estate and construction, alongside consumer and commercial business lending.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net interest income | $9.73 million, up 5.2% year over year | $28.79 million, up 10.7% |
| Non-interest income | $3.15 million, down 0.3% | $9.36 million, up 1.5% |
| Non-interest expense | $7.12 million, up 2.7% | $21.52 million, up 4.4% |
| Net income | $4.42 million, up 3.2% | $12.30 million, up 16.6% |
| Diluted EPS | $0.59, versus $0.58 | $1.64, versus $1.44 |
| Net interest margin | 4.18%, versus 4.29% | 4.19%, versus 4.03% |
| Efficiency ratio | 55.33%, versus 55.94% | 56.41%, versus 58.48% |
At June 30, total assets were $1.006 billion, up 5.7% from September 30, 2017. Net loans were $717.3 million, up 3.9%; deposits were $880.7 million, up 5.1%; and shareholders’ equity was $120.9 million, up 8.9%. Growth in loans included commercial real estate and construction lending. No FHLB borrowings were outstanding.
Cash and cash equivalents were $156.8 million; certificates of deposit held for investment were $63.1 million, together totaling approximately $220.0 million. For the nine months, operating cash flow was $16.5 million, investing cash flow was negative $47.6 million, and financing cash flow was $39.7 million, producing an $8.6 million increase in cash and cash equivalents.
The Bank reported a 24.98% regulatory liquidity ratio and $281.8 million of available FHLB borrowing capacity, subject to collateral. It also reported $71.35 million available through its Federal Reserve borrowing line and no outstanding balance there. The Bank was classified as well-capitalized; its actual leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 11.53%, 16.56%, 16.56%, and 17.81%, respectively.
Material changes and notable items
- Quarterly net interest margin declined year over year, while the nine-month margin improved. The prior-year quarter included significant non-accrual interest collections and an FHLB prepayment penalty, affecting comparability.
- The effective tax rate fell to 23.20% for the quarter and 26.04% for the nine months, versus 33.84% and 33.55%. The Tax Act reduced the federal corporate rate; a one-time $548,000 deferred-tax-asset write-down was recorded in the December 2017 quarter.
- Non-performing assets were $5.68 million, or 0.56% of assets, versus $5.75 million and 0.60% at September 30. However, non-accrual loans rose to $2.71 million, and loans non-accrual or at least 90 days past due totaled $3.13 million. The allowance for loan losses was $9.53 million, 1.31% of loans and 304.1% of non-performing loans.
- Management recorded no provision or recapture of loan losses in the current quarter or nine-month period; the comparable 2017 periods included recaptures of $1.0 million and $1.25 million. The current nine-month period had net charge-offs of $21,000, versus net recoveries of $1.03 million in 2017.
- On May 23, 2018, Timberland agreed to acquire South Sound Bank. Based on shares outstanding at signing, consideration comprises 904,918 Timberland shares and $6.90 million cash. Closing was expected in the fourth calendar quarter of 2018, subject to shareholder and regulatory approvals and customary conditions. Merger-related professional fees included $147,000 in the quarter.
Outlook, risks, and contingencies
The filing gives no specific earnings or financial guidance. Management said it expected to have sufficient funds for current loan commitments. It anticipated that adoption of the expected-credit-loss standard (ASU 2016-13) could increase the allowance for loan losses, but the amount was not yet determinable. Management judged goodwill not impaired at May 31, 2018.
Key disclosed risks include credit deterioration, especially in housing and commercial real estate; changes in interest rates, deposit costs, and loan demand; deposit retention and liquidity; regulatory actions; and merger approval, execution, integration, and realization of expected benefits. Management stated that the existing allowance was adequate, while cautioning that actual losses or regulatory review could require a material increase. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the South Sound Bank transaction received required approvals and closed on expected terms and timing.
- Whether rising non-accrual and past-due loans develop into losses, and whether the allowance remains adequate.
- How deposit pricing and asset yields affect net interest margin as rates and funding competition change.
- The eventual allowance impact and implementation timing of the expected-credit-loss accounting standard.
- Whether reported earnings growth persists after the effects of tax reform and prior-period loan-loss recaptures are considered.