Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014. The filing was signed August 11, 2014. Amounts below are in millions of dollars unless stated otherwise. Timberland Bancorp is a Washington-based bank holding company operating Timberland Bank, a community bank serving western Washington.
Financial performance and condition
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Net interest income | $6.43 | $19.33 |
| Net interest margin | 3.86% | 3.83% |
| Net income | $1.43 | $4.20 |
| Net income to common shareholders | $1.43 | $4.00 |
| Diluted earnings per share | $0.20 | $0.57 |
| Non-interest income | $2.12 | $6.32 |
| Non-interest expense | $6.43 | $19.43 |
| Provision for loan losses | None | None |
Quarterly net income rose 63.7% from $0.88 million a year earlier; nine-month net income rose 8.8% from $3.86 million. Management attributed the improvement primarily to lower loan-loss provisions. Net income to common shareholders also benefited from the December 2013 redemption of the remaining preferred shares, eliminating preferred dividends and accretion in 2014.
Quarterly net interest income declined 1.0% year over year, while nine-month net interest income was essentially unchanged. Lower asset yields were largely offset by reduced funding costs. The efficiency ratio increased to 75.21% for the quarter and 75.27% year to date, from 70.31% and 69.12%, respectively. Annualized return on average assets was 0.79% for the quarter and 0.76% year to date; return on average equity was 7.12% and 6.76%.
- Balance sheet at June 30: Assets were $727.63 million, down 2.4% from September 30, 2013. Net loans were $557.70 million, up 1.7%; deposits were $598.63 million, down 1.6%; and shareholders’ equity was $81.33 million, down 9.3%.
- Loan mix and growth: Commercial real estate loans were $299.71 million, about 50.7% of the reported loan portfolio. Construction and land development loans increased to $53.70 million from $45.14 million at September 30; commercial business loans increased to $25.34 million from $17.50 million.
- Credit quality: Non-accrual and 90-days-past-due loans totaled $12.24 million, or 2.15% of loans, versus $14.05 million and 2.51% at September 30. Non-performing assets were $24.57 million, or 3.38% of assets, versus $27.95 million and 3.75%. The allowance was $10.56 million, 1.86% of loans and 86.3% of non-performing loans.
- Cash flow and liquidity: For the nine months, operating cash flow was $6.23 million, investing cash flow was negative $14.30 million and financing cash flow was negative $22.47 million. Cash and cash equivalents fell $30.53 million to $63.97 million. The Bank’s regulatory liquidity ratio was 14.55%.
- Borrowings and capital: FHLB advances were unchanged at $45.00 million; no FRB or PCBB line borrowings were outstanding. The filing reports $133.02 million of additional FHLB borrowing capacity and $43.45 million available from the FRB. The Bank’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 10.25%, 13.13% and 14.38%, respectively; management said the Company and Bank exceeded applicable capital requirements.
Material changes and management commentary
- Lower loan-loss provisions were the principal driver of higher earnings: there was no provision in the 2014 quarter or nine-month period, compared with $1.39 million and $2.76 million, respectively, in the 2013 periods.
- Loan originations fell 23.9% year to date, largely reflecting weaker refinance demand. Sales of fixed-rate one- to four-family loans fell 68.8%, reducing gains on loan sales and non-interest income.
- Non-interest expense increased 3.3% year to date, led by salaries and benefits and technology-related costs, including core processing and electronic-funds-transfer upgrades. Management noted that no MSR valuation reserve remained available for future recovery at June 30.
- Cash balances declined substantially, partly reflecting the $12.07 million preferred-stock redemption, loan growth and lower deposits. Deposits declined as certificates of deposit and money-market balances fell, partly offset by growth in non-interest-bearing and transaction accounts.
- The Company disposed of 20 OREO properties for a total of $5.72 million during the nine months; OREO and other repossessed assets ended the period at $11.17 million. The annual goodwill impairment test concluded goodwill was not impaired, but the result depends on judgmental valuation assumptions.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue or margin guidance. Management stated that it expected to have sufficient funds for current loan commitments. At June 30, loan commitments were $44.51 million, undisbursed construction loans were $21.46 million, and certificates of deposit due within one year totaled $97.26 million.
Key risks identified include credit deterioration and the adequacy of the loan-loss allowance; changes in real estate values and economic conditions; interest-rate and funding pressures; competition and deposit retention; regulatory examinations and capital requirements; operating-cost control; technology and cybersecurity failures; and valuation uncertainty for impaired loans, OREO, securities and goodwill. Management cautioned that actual results may differ from forward-looking statements. The Company reported no material legal proceedings and no material changes to risk factors disclosed in its 2013 Form 10-K.
Disclosure controls were reported effective as of June 30, 2014, with no material change in internal control over financial reporting during the quarter. The interim statements are unaudited, and management noted that nine-month results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the zero loan-loss provision remains supportable given $12.24 million of non-performing loans, $19.44 million of troubled debt restructurings and the concentration in commercial real estate and construction lending.
- Whether the reduction in non-performing assets and OREO is sustainable, and whether collateral values and related allowance assumptions remain reasonable.
- How deposit trends, upcoming CD maturities, loan commitments and the sharp decline in cash affect liquidity and funding costs.
- Whether weaker loan-sale volumes, lower refinance activity and technology-related expense increases continue to pressure non-interest income and the efficiency ratio.
- The effect of the preferred-stock redemption on capital, shareholder distributions and future earnings per share; also verify the reported share counts and per-share data against the underlying filing tables.