Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012; comparative operating results are for the three months ended December 31, 2011. Balance-sheet comparisons are with September 30, 2012. Unaudited. The filing was signed February 8, 2013.
Business context and financial performance
Timberland Bancorp is the holding company for Timberland Bank, a community bank operating 22 branches in western Washington. Lending is concentrated in real estate, including commercial real estate, residential and construction loans, alongside consumer and commercial business lending. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter / comparison |
|---|---|---|
| Interest and dividend income | $7.59 million | $8.03 million; down 5.5% |
| Net interest income | $6.39 million | $6.30 million; up 1.4% |
| Net interest margin | 3.78% | 3.73% |
| Provision for loan losses | $0.20 million | $0.65 million |
| Non-interest income | $2.72 million | $2.44 million; up 11.1% |
| Non-interest expense | $6.38 million | $6.22 million; up 2.5% |
| Net income | $1.71 million | $1.28 million; up 33.1% |
| Net income to common shareholders; diluted EPS | $1.44 million; $0.21 | $1.02 million; $0.15 |
| Return on average assets / equity | 0.92% / 7.53% | 0.70% / 5.93% |
| Efficiency ratio | 70.05% | 71.14% |
Management attributed higher earnings mainly to a lower loan-loss provision and higher net interest and non-interest income, partly offset by increased operating expenses. Net interest margin improved as funding costs declined faster than asset yields. The effective tax rate was 32.4%, compared with 31.5%.
Financial position, cash flow and credit quality
- Balance sheet at Dec. 31: Total assets were $734.62 million, down 0.3% from Sept. 30. Net loans were $544.93 million, up 1.2%; deposits were $594.40 million, down 0.6%; and shareholders’ equity was $91.90 million, up 1.8%.
- Funding and debt: Cash and cash equivalents were $85.85 million, versus $96.67 million at Sept. 30. FHLB advances were unchanged at $45.00 million; repurchase agreements were $0.63 million. FHLB advances have stated rates of 3.69%–4.34%, scheduled maturities in 2017, and some may be callable earlier. The company reported no brokered deposits.
- Cash flow for the quarter: Operating activities provided $2.17 million, investing activities used $9.03 million, and financing activities used $3.97 million. Cash and cash equivalents decreased by $10.82 million. Investing outflows included $6.63 million of net loan growth.
- Liquidity: The Bank’s regulatory liquidity ratio was 19.00%. Available borrowing capacity was reported as $162.44 million from the FHLB and $57.51 million from the FRB, subject to collateral and facility terms. Certificates of deposit totaling $127.04 million were scheduled to mature within one year; management said it expected available funds to meet current loan commitments.
- Credit quality: The allowance for loan losses was $11.77 million, or 2.11% of loans receivable and loans held for sale, and 53.3% of non-performing loans. Non-performing assets were $37.66 million, or 5.13% of assets; non-accrual and 90-days-past-due loans totaled $22.09 million. Troubled debt restructurings totaled $23.74 million, including $13.01 million on accrual status.
- Capital: The Bank’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 11.17%, 14.73% and 15.99%, respectively; the filing states the company and Bank exceeded applicable requirements. Common book value per share was $10.73 and tangible book value was $9.90.
Material changes, outlook and risks
- Year-over-year net interest income rose modestly despite lower interest income, as interest expense fell 30.7%. The loan-loss provision declined 69.2%; net charge-offs were $0.26 million versus $0.62 million a year earlier.
- Non-interest income growth included a $0.25 million mortgage-servicing-rights valuation recovery and higher gains on loan sales. Non-interest expense rose primarily due to salaries and employee benefits; OREO expense declined, including a $0.21 million net gain from OREO sales.
- Commercial real estate loans increased during the quarter, while construction and land-development and land-loan balances declined. The Bank reported $270.54 million of commercial mortgage loans, 47.3% of total loans before specified deductions. Management identified real estate exposures and loan-loss estimates as areas of credit risk and judgment.
- The FDIC and Washington DFI rescinded the Bank’s Memorandum of Understanding on December 12, 2012; the Federal Reserve rescinded the Company’s MOU on January 15, 2013. The Treasury sold the Company’s Series A preferred shares in November 2012; the sale did not provide proceeds to the Company or change its capital position. The 5% preferred dividend and discount accretion reduced income available to common shareholders.
- The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of the full fiscal year. Principal stated risks include loan losses and real estate values, economic conditions, interest rates and funding, deposit retention, regulation, competition, operating costs, fair-value estimates, and technology and third-party disruptions. Management considered the allowance adequate but warned actual losses or regulatory review could require additional provisions.
- Management reported no material legal proceedings, no material changes in market-risk disclosures, and effective disclosure controls as of quarter-end. It reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit trends improve: non-performing assets, non-accrual loans, troubled debt restructurings, charge-offs and allowance coverage.
- Whether the commercial real estate concentration and continued loan growth remain manageable, and how changes in collateral values affect expected losses.
- Whether deposit levels and upcoming certificate maturities support liquidity without increased reliance on borrowings.
- Whether the margin holds up as asset yields and funding costs change, and whether reported earnings remain supported without further MSR valuation recoveries or lower provisions.
- The terms and potential call provisions of FHLB advances, and any subsequent changes in regulatory capital, preferred-stock obligations or borrowing availability.