Timberland Bancorp, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. This is an annual report, not a standalone fourth-quarter filing; quarterly results for the quarter ended September 30, 2015 are noted below. The Company operates primarily through Timberland Bank, a community bank serving western Washington.
Financial performance and position
| Metric | FY2015 / September 30, 2015 | Comparable period |
|---|---|---|
| Total assets | $815.8 million | $745.6 million at September 30, 2014 |
| Net loans, including loans held for sale | $607.3 million | $565.8 million at September 30, 2014 |
| Deposits | $678.9 million | $615.1 million at September 30, 2014 |
| FHLB advances | $45.0 million | $45.0 million at September 30, 2014 |
| Shareholders’ equity | $89.2 million | $82.8 million at September 30, 2014 |
| Net interest income | $27.3 million | $25.9 million in FY2014 |
| Net income | $8.3 million; diluted EPS $1.17 | $5.9 million; diluted EPS $0.80 in FY2014 |
| Net interest margin | 3.80% | 3.84% in FY2014 |
| Return on average assets / equity | 1.07% / 9.70% | 0.79% / 7.08% in FY2014 |
| Cash flows | Operating $7.6 million; investing use $49.1 million; financing $61.5 million; cash increased $19.9 million | FY2014 cash decreased $22.1 million |
FY2015 interest and dividend income was $31.2 million; non-interest income was $9.5 million and non-interest expense was $25.8 million. The allowance for loan losses was $9.9 million, or 1.61% of loans receivable, and the Company recorded a $1.5 million recapture of loan losses. The final quarter’s net income was $3.0 million, including that recapture.
Liquidity was supported by $92.3 million of cash and cash equivalents, $48.6 million of investment CDs, and $9.3 million of investment securities. Management reported a 20.3% regulatory liquidity ratio and $255.4 million of additional FHLB and Federal Reserve borrowing capacity. The Bank was classified as well capitalized: CET1 13.43%, Tier 1 risk-based 13.43%, total risk-based 14.69%, and leverage 10.29%.
Material changes versus FY2014
- Net income rose 41.7%; diluted EPS increased from $0.80 to $1.17. The improvement reflected the loan-loss recapture, higher net interest income and higher non-interest income.
- Net interest income increased 5.2%, while net interest margin eased four basis points to 3.80%. Non-interest income increased 11.6%, driven principally by higher gains on loan sales and ATM/debit interchange fees. Non-interest expense was nearly flat.
- Assets grew 9.4%, deposits 10.4%, and net loans 7.3%. Deposit growth was concentrated in non-interest-bearing, NOW, savings and money-market accounts; certificates of deposit declined.
- Construction and land development loans increased $42.4 million, or 62%, to $110.9 million. The increase included substantial growth in commercial and multifamily construction lending. Total gross loan originations rose 35.2% to $265.5 million.
- Credit metrics improved: non-accrual loans declined to $6.0 million from $10.9 million; total non-performing assets fell to $15.0 million from $21.9 million. The allowance declined from $10.4 million, while its coverage of non-performing loans increased to 160.3% from 89.0%.
- OREO and other repossessed assets decreased to $7.9 million from $9.1 million, after $644,000 of valuation write-downs and $2.7 million of dispositions. Shareholders’ equity increased 7.7%, after $1.7 million in common dividends and $709,000 of share repurchases.
Outlook, commentary and principal risks
Management described the economic recovery in its Washington markets as modest and uneven. Its stated priorities include resolving problem assets, growing core deposits, expanding in existing markets, continuing mortgage loan sales, diversifying lending, and managing exposure to rising rates. The filing gives no specific FY2016 earnings or revenue guidance.
Management’s rate-shock model estimated that an immediate 200-basis-point rate increase would raise projected net interest income by 6.5% and net portfolio value by 7.5%; a 100-basis-point decrease would lower them by 3.5% and 6.7%, respectively. These are model estimates based on assumptions, not forecasts.
- Credit and concentration risk remain significant: 94.3% of loans and loans held for sale were secured by real estate; commercial real estate loans were 43.3% of the loan portfolio. Potential problem loans were $23.5 million, and performing troubled debt restructurings were $12.5 million.
- Construction lending grew rapidly and is inherently exposed to cost overruns, completion values, sales or refinancing, and local property conditions. The filing reports all construction loans performing at year-end; speculative one- to four-family construction loans were $6.7 million.
- Interest-rate, funding and deposit-pricing risks include possible increases in funding costs, competition for deposits, and effects on adjustable-rate borrowers. $93.9 million of CDs were due within one year.
- Other disclosed risks include real estate collateral and OREO valuation uncertainty, private-label mortgage-backed securities, regulatory and capital changes, cyber and third-party service-provider disruptions, and local economic weakness. The Company recognized $13,000 of OTTI charges on private-label mortgage-backed securities in FY2015; $932,000 of such securities were on non-accrual status.
- The Company had an outstanding warrant for up to 370,899 shares at $6.73 per share, exercisable through December 23, 2018. No material pending legal proceeding was identified; management said ordinary-course claims were not expected to have a material effect.
Important facts for investors to verify
- Whether the loan-loss recapture and improving delinquency and non-performing asset trends are sustainable, and whether the $9.9 million allowance remains adequate.
- Construction and commercial real estate growth, borrower/project exposures, undisbursed commitments, and subsequent loan performance and collateral values.
- Deposit mix and retention, brokered deposits, near-term certificate maturities, borrowing availability, and the terms and maturity features of the $45.0 million FHLB advances.
- Actual net interest margin and funding-cost sensitivity as market rates change, compared with management’s modeled rate scenarios.
- Future OREO sales and write-downs, performance of troubled debt restructurings and potential problem loans, and the status of the non-accrual private-label securities.
- Capital and shareholder-return constraints, including Basel III buffer requirements, dividends and repurchases, and potential dilution from the warrant and equity awards.