Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; comparative income and cash-flow data are for the periods ended June 30, 2015. Balance-sheet comparisons are to September 30, 2015. The company is a Washington community bank operating through Timberland Bank, with 22 branches. Figures below are in millions unless otherwise noted.
Financial performance
| Metric | Quarter ended June 30, 2016 | Prior-year quarter | Nine months ended June 30, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Net interest income | $7.62 | $6.98 | $23.00 | $20.25 |
| Non-interest income, net | $2.75 | $2.52 | $7.78 | $6.86 |
| Non-interest expense | $6.57 | $6.22 | $19.68 | $19.15 |
| Net income | $2.55 | $2.16 | $7.46 | $5.34 |
| Diluted earnings per share | $0.36 | $0.31 | $1.05 | $0.76 |
| Net interest margin | 3.83% | 3.88% | 3.91% | 3.81% |
| Efficiency ratio | 63.37% | 65.43% | 63.93% | 70.62% |
Quarterly net income rose 18.0%; nine-month net income rose 39.7%. Quarterly growth reflected higher net interest and non-interest income, partly offset by higher expenses. For the nine-month period, return on average assets was 1.18% versus 0.93%, and return on average equity was 10.88% versus 8.40%.
Financial position, cash flow and liquidity
- Assets and lending: Total assets were $858.14, up 5.2% from September 30, 2015. Net loans were $647.37, up 7.1%. Loan growth included construction, commercial business, consumer and commercial real estate lending; construction loans included $25.45 of growth, primarily custom and owner/builder projects.
- Funding and debt: Deposits were $715.38, up 5.4%; non-interest-bearing demand deposits were $149.58. FHLB advances remained $45.00. Three $15.00 long-term advances bear rates of 3.69%–4.34%, with scheduled maturities in fiscal 2017; the filing says maturities are expected to reduce interest expense. Some advances may be callable earlier.
- Liquidity: Cash and cash equivalents plus investment CDs totaled $141.61. The bank reported a 19.75% regulatory liquidity ratio. It had $189.91 of stated additional FHLB borrowing availability, $53.68 available from the Federal Reserve, and a $10.00 PCBB line; none was outstanding on the latter two facilities. Loan commitments were $76.31, and undisbursed construction loans were $51.16. CDs maturing within one year totaled $89.18.
- Cash flows: For the nine months, operating activities provided $7.22, investing activities used $44.26, and financing activities provided $33.92. Cash and cash equivalents decreased $3.12 to $89.17.
- Capital and shareholder returns: Shareholders’ equity was $94.45. The bank exceeded regulatory capital requirements and was classified as well-capitalized; its total risk-based capital ratio was 15.05%. Dividends were $0.28 per share for the nine months. The company repurchased 66,000 shares for $0.82 during the period; 221,893 shares remained authorized under its repurchase plan at June 30.
Material changes and asset quality
- Non-performing assets fell 42.3% from September 30, 2015, to $8.64; the ratio to total assets improved to 1.01% from 1.84%. Non-accrual loans declined to $2.96 from $6.04, and OREO/repossessed assets declined to $4.76 from $7.85, partly following the disposition of 13 properties.
- The allowance for loan losses was $9.84, or 1.50% of loans and 318.5% of non-performing loans, compared with $9.92 at September 30, 2015. No loan-loss provision was recorded in the quarter or nine-month period. Nine-month net charge-offs were $0.08, compared with net recoveries of $0.04 a year earlier.
- Troubled debt restructurings totaled $8.21, down from $13.72 at September 30, 2015; no new restructurings were reported in the nine-month period, and no restructured loans defaulted within 12 months of restructuring.
- The loan portfolio remained concentrated in mortgage lending: commercial mortgage loans were 41.5% of loans and total mortgage loans were 87.9%. Construction-custom and owner/builder loans increased to $88.59 from $62.95.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management stated that it expected available funding to meet current loan commitments and that the bank generally maintained sufficient liquidity. Management considered the allowance adequate, but cautioned that estimates could prove incorrect and that regulators could require additional reserves. The company’s annual goodwill impairment test, conducted with an independent valuation firm, found no impairment as of May 31, 2016; management reported no subsequent indicators of potential impairment as of June 30.
Key disclosed risks include credit deterioration, real estate and local economic conditions, interest-rate and deposit competition, loan demand and secondary-market conditions, regulatory actions and changes, expense control, technology or third-party service disruptions, and the judgment involved in valuing assets. Management reported no material change in previously disclosed risk factors and no material legal proceedings. Disclosure controls were concluded to be effective; no material change in internal control over financial reporting was reported.
Unusual and notable items include a $0.30 gain on sale of excess land in the prior-year quarter, which affects expense comparisons; $0.03 of net OTTI recognized in earnings for the nine months; and increased deposit service charges partly attributed to accounts associated with Washington’s marijuana industry.
Investor verification points
- Assess whether rapid loan growth—particularly in construction, commercial real estate and commercial business—remains consistent with underwriting quality and concentration limits.
- Review the allowance and credit trends alongside the absence of a provision, current charge-offs, past-due loans and the remaining non-performing assets.
- Verify the timing, call provisions and expected expense impact of the $45.00 in FHLB advances scheduled to mature in fiscal 2017.
- Monitor deposit retention and funding needs against $89.18 of CDs maturing within one year, $76.31 of loan commitments and $51.16 of undisbursed construction loans.
- Confirm that reported liquidity and capital remain adequate under changing rates, credit conditions and regulatory requirements; the filing states that nine-month results are not necessarily indicative of full-year results.