Timberland Bancorp, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. This annual filing covers the full fiscal year; the fourth-quarter results are noted separately below. Timberland is a Washington bank holding company operating primarily through Timberland Bank, a community bank serving western Washington.
Financial performance and condition
| Metric | FY2014 / September 30, 2014 | Prior comparable period |
|---|---|---|
| Net income | $5.85 million | $4.76 million, up 23.0% |
| Net income to common shareholders | $5.64 million | $4.02 million, up 40.4% |
| Diluted EPS | $0.80 | $0.58 |
| Net interest income / margin | $25.92 million / 3.84% | $25.80 million / 3.82% |
| Non-interest income | $8.53 million | $10.26 million |
| Non-interest expense | $25.80 million | $25.86 million |
| Total assets | $745.6 million | $745.6 million |
| Net loans, including loans held for sale | $565.8 million | $548.1 million, up 3.2% |
| Deposits | $615.1 million | $608.3 million, up 1.1% |
| Shareholders’ equity | $82.8 million | $89.7 million, down 7.7% |
Cash flow: Operating cash flow was $8.6 million, investing cash flow was negative $24.5 million, and financing cash flow was negative $6.3 million. Cash and cash equivalents declined $22.1 million to $72.4 million; the decrease principally funded loan growth and other investing activity.
Funding and liquidity: The Bank had $45.0 million of FHLB advances outstanding, unchanged year over year. Its regulatory liquidity ratio was 16.19%. Reported additional FHLB and Federal Reserve borrowing capacity was approximately $171.6 million, subject to collateral and facility terms. Deposits included $106.4 million of non-interest-bearing accounts; certificates of deposit totaling $98.5 million matured within one year.
Capital: The Bank was categorized as well capitalized. Its Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 10.2%, 13.2%, and 14.5%, respectively. The Company completed redemption of its remaining $12.1 million Series A preferred stock in December 2013; no preferred shares remained at fiscal year-end.
Fourth quarter: For the quarter ended September 30, 2014, net income was $1.65 million and diluted EPS was $0.23.
Material changes versus FY2013
- Profit increased mainly because the Bank recorded no loan-loss provision, versus $2.93 million in FY2013, and reduced net charge-offs to $709,000 from $3.61 million.
- Net interest income rose modestly as lower funding costs more than offset a decline in earning-asset yields. Net interest margin increased two basis points to 3.84%.
- Non-interest income fell 16.9%, chiefly because loan-sale gains declined with reduced mortgage refinancing and the prior-year MSR valuation recovery did not recur.
- Asset quality improved overall: non-accrual loans fell to $10.9 million from $13.6 million, and non-performing assets declined to $21.9 million from $28.0 million. OREO and repossessed assets decreased to $9.1 million from $11.7 million.
- Loan growth reflected higher custom and owner/builder construction and commercial business balances. Commercial real estate remained the largest loan category at $294.4 million, or 48.5% of loans.
- Equity declined mainly due to the preferred-stock redemption and shareholder dividends, partly offset by net income. Cash and cash equivalents also declined substantially while deposits increased modestly.
Outlook, commentary, risks and unusual items
Management described economic conditions in its Washington markets as improving but still uneven, and said ongoing economic stress could remain challenging. It intends to focus on resolving problem assets, disciplined growth in commercial and multifamily lending, mortgage banking, increasing core retail deposits, and limiting speculative construction, land-development, and land-lending exposure. The filing provides no specific earnings or growth guidance.
- Credit concentration and residual problem assets: About 94% of loans and loans held for sale were real-estate-secured. Commercial real estate, construction/land development, and land lending together represented approximately 64.6% of the loan portfolio. The Bank disclosed $33.4 million of potential problem loans, $33.5 million of impaired loans, and $19.1 million of troubled debt restructurings, including $2.3 million on non-accrual status. A $3.7 million Grays Harbor land loan was the largest non-performing loan.
- Allowance judgment: The allowance was $10.4 million, or 1.81% of loans and 89% of non-performing loans. Management considered it adequate, but noted that changing collateral values, economic conditions, or regulatory review could require additional provisions. The absence of a FY2014 provision materially benefited earnings.
- Interest-rate exposure: Management’s model estimated that an immediate 200-basis-point rate increase would raise projected net interest income 7.0%, while a 100-basis-point decrease would reduce it 2.6%. These are model estimates and depend on assumptions about repricing, prepayments, and deposit behavior.
- Other exposures: Risks include continued weak local economies or real estate values, competition for loans and deposits, funding availability, regulation and Basel III capital rules, and technology, cybersecurity, vendor, and operational risks. The Bank’s $1.3 million private-label mortgage-backed securities position included $1.1 million on non-accrual status; management recorded a $59,000 net OTTI recovery in FY2014.
- Contingencies and controls: Management said pending ordinary-course legal matters were not expected to have a material financial effect. The independent auditor issued an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective as of September 30, 2014.
Most important facts for investors to verify
- Whether asset-quality improvement continues, especially for the $33.4 million potential-problem-loan pool, accruing restructured loans, and the large non-performing land credit.
- Whether the $10.4 million allowance remains adequate as real estate collateral values and local economic conditions change, and whether future earnings can sustain performance without provision releases or unusually low credit costs.
- How the commercial real estate and construction concentration performs, including exposure to refinancing, balloon maturities, and borrower cash flows.
- Whether core deposit growth and available borrowing capacity are sufficient to fund commitments and maintain liquidity as rates and competition change.
- The effect of the fully redeemed preferred stock on common-shareholder returns, and potential dilution from the outstanding warrant for up to 370,899 shares at an exercise price of $6.73 through December 23, 2018.