Business context and reporting period
Timberland Bancorp, Inc. is the holding company for Timberland Bank, a community bank operating 22 branches in western Washington. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2017, the company’s fiscal third quarter and year-to-date period.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net interest income | $9.25 million, up 21.4% | $26.01 million, up 13.1% |
| Net income | $4.28 million, up 67.9% | $10.55 million, up 41.5% |
| Diluted earnings per share | $0.58, versus $0.36 | $1.44, versus $1.05 |
| Net interest margin | 4.29%, versus 3.83% | 4.03%, versus 3.91% |
| Efficiency ratio | 55.94%, versus 63.37% | 58.48%, versus 63.93% |
| Return on average assets / equity | 1.86% / 16.14% | 1.53% / 13.80% |
Quarterly total interest and dividend income was $10.17 million; non-interest income was $3.16 million and non-interest expense was $6.94 million. The company recorded a $1.00 million loan-loss recapture in the quarter and a $1.25 million recapture year to date. These recaptures boosted reported income; they were attributed to net recoveries and improved credit metrics.
At June 30, 2017, total assets were $931.01 million, up 4.4% from September 30, 2016. Net loans were $687.16 million, up 3.6%, and deposits were $818.82 million, up 7.5%. Shareholders’ equity was $108.62 million, up 12.2%. Cash and cash equivalents were $132.44 million; cash plus investment CDs totaled $173.63 million. FHLB borrowings were zero, down from $30.00 million at fiscal year-end. The bank reported a 21.56% regulatory liquidity ratio and substantial available borrowing capacity.
For the nine-month period, operating cash flow was $10.37 million, investing cash flow was a use of $15.03 million, and financing cash flow was $28.16 million. Cash and cash equivalents increased $23.50 million to $132.44 million. The bank’s regulatory capital ratios exceeded minimum requirements; it was categorized as well-capitalized. Its total capital ratio was 16.64% and leverage ratio was 10.98%.
Material changes versus comparable periods
- Net income increased substantially, reflecting higher net interest income, higher non-interest income and loan-loss recaptures, partly offset by increased operating expenses.
- Quarterly net interest income benefited from asset growth and higher yields, including $819,000 of non-accrual interest and prepayment penalties collected. Management estimated these collections, net of borrowing prepayment penalties, added about 25 basis points to the quarterly net interest margin.
- Non-interest income rose 14.8% for the quarter and 18.6% year to date. Deposit service charges, loan-sale gains and debit-card interchange fees were key contributors.
- Non-interest expense increased 5.6% for the quarter and 4.7% year to date, primarily from salaries and benefits. The year-to-date increase also included deposit operations and professional fees.
- Non-performing assets declined to $6.06 million from $7.86 million at September 30, 2016; non-performing assets were 0.65% of total assets versus 0.88%. The allowance for loan losses was $9.61 million, or 1.38% of loans receivable.
- The company prepaid $30 million of FHLB borrowings in April, incurring a $282,000 penalty. It reported eliminating approximately $100,000 of interest expense per month after the payoff. Deposit growth funded much of the balance-sheet expansion.
Outlook, risks and unusual items
The filing gives no specific earnings or growth guidance. Management said it expected to meet current loan commitments and considered liquidity sufficient; it also noted $84.67 million in loan commitments and $72.13 million in undisbursed construction loans. Results are not guaranteed, and year-to-date results are not necessarily indicative of the full fiscal year.
Important risks include commercial real estate and construction credit quality, real estate values, loan demand and secondary-market sales, interest-rate and funding changes, deposit retention, regulatory actions, competition, operating costs, cybersecurity and third-party service-provider failures. The loan portfolio is concentrated in real estate: commercial mortgage loans were 43.0% of total loans at June 30. Management’s allowance adequacy estimate depends on assumptions and is subject to regulatory review.
Notable items include the loan-loss recapture and collections of previously non-accrual interest; the FHLB prepayment penalty; and exercise of the Treasury-originated warrant in January 2017, issuing 370,899 shares for approximately $2.50 million. The company also reported increased deposit service charges associated with Washington marijuana-industry business accounts. It stated that handling such accounts is permitted in Washington when federal regulatory guidelines are followed. Management reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- How much of earnings and margin improvement is repeatable without loan-loss recaptures and elevated recoveries of non-accrual interest and penalties?
- Whether loan growth, particularly commercial real estate and construction lending, changes portfolio concentration or credit performance; monitor delinquencies, non-accrual loans and the allowance.
- Whether strong deposit growth continues and at what funding cost, especially as interest rates and competition change.
- The recurring savings from FHLB debt repayment relative to its $282,000 penalty, and the implications of the reported loan commitments and construction-loan disbursements for liquidity.
- Potential share dilution and capital allocation following warrant exercise, alongside dividends and the remaining share-repurchase authorization.