TIMBERLAND BANCORP INC annual report, FY2011

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Timberland Bancorp, Inc. — FY2011 Form 10-K

Reporting period: Fiscal year ended September 30, 2011; comparisons are primarily with fiscal 2010. The company is a bank holding company operating through Timberland Bank, a community bank serving western Washington. It reported one operating segment.

Financial performance and position

  • Assets and equity: Total assets were $738.2 million, down 0.6% year over year. Shareholders’ equity was $86.2 million, up 0.9%.
  • Loans and deposits: Net loans, including loans held for sale, were $528.0 million, essentially unchanged. Deposits rose 2.4% to $592.7 million. Commercial real estate loans increased $38.0 million, while construction and land development loans fell $16.8 million and land loans fell $13.8 million.
  • Revenue and profit: Net interest income was $25.4 million, down 0.8%. Non-interest income rose 52.4% to $8.7 million. Net income was $1.1 million, versus a $2.3 million net loss in FY2010. After preferred dividends and discount accretion, income attributable to common shareholders was $32,000; reported diluted earnings per share were $0.00.
  • Margins and expenses: Net interest margin declined to 3.78% from 3.87%, as asset yields fell faster than funding costs. The efficiency ratio improved to 76.11% from 78.65%. Non-interest expense increased 5.4% to $26.0 million.
  • Credit costs: Provision for loan losses declined to $6.8 million from $10.6 million. Net charge-offs fell to $6.1 million from $13.5 million. The allowance was $11.9 million, equal to 2.21% of loans and 51.2% of non-performing loans.
  • Problem assets: Non-performing assets were $37.0 million, or 5.01% of assets, down from $41.1 million and 5.53%. Potential problem loans increased to $62.5 million from $43.7 million; impaired loans were $48.5 million. Accruing troubled debt restructurings totaled $18.2 million.
  • Cash flow and liquidity: Operating cash flow was $10.7 million; investing cash outflow was $4.2 million and financing cash outflow was $6.2 million. Cash and cash equivalents increased $279,000 to $112.1 million. The Bank’s liquidity ratio was 22.20%.
  • Debt and capital: FHLB advances were $55.0 million, down from $75.0 million; repurchase agreements were $729,000. The Bank reported a 10.3% Tier 1 leverage ratio and 15.3% total risk-based capital ratio, meeting its MOU requirement of at least 10.0% Tier 1 leverage capital.

Material changes and unusual items

  • Return to consolidated profitability was driven chiefly by lower loan-loss provisions and higher non-interest income, partly offset by margin compression and higher operating costs.
  • Non-interest income benefited from a $1.30 million year-over-year improvement in the net mortgage-servicing-rights valuation and a $1.73 million reduction in net investment-security impairment charges. FY2011 still included a $447,000 net other-than-temporary impairment charge on private-label mortgage-backed securities.
  • The Bank recognized a $405,000 MSR valuation recovery, while OREO and foreclosure-related costs increased. OREO and other repossessed assets totaled $10.8 million at year-end.
  • Residential fixed-rate loan originations and sales remained part of the mortgage-banking strategy. Loans originated totaled $160.2 million, down 12.3%; fixed-rate loan sales were $62.5 million, down from $68.3 million.

Outlook, management commentary and risks

  • Management described continued weak local economic and real-estate conditions as a threat to asset quality. The Bank planned to resolve problem assets, limit speculative construction, land-development and land lending, grow core deposits, and manage commercial real-estate lending with discipline. No quantified FY2012 earnings or growth guidance was provided.
  • Credit exposure is concentrated in real estate and Washington borrowers: commercial real estate was 43.9% of the loan portfolio, and real-estate-secured loans were 94.5% of total loans including construction funds not yet disbursed. Management cited local property values, unemployment, borrower cash flows and collateral valuations as key uncertainties.
  • The Bank and holding company remained subject to separate regulatory memoranda of understanding. The Bank faced limits on dividends, balance-sheet changes and growth without regulatory approval; the Company faced restrictions on dividends, capital distributions, debt and stock transactions.
  • The Federal Reserve had denied payment of cumulative TARP preferred-stock dividends due since May 2010. Accrued preferred dividends were $1.25 million at year-end; the Treasury had the right to appoint two directors after six unpaid quarters. The preferred stock’s dividend rate is scheduled to increase from 5% to 9% in December 2013 if not redeemed.
  • Management cited potential effects from regulatory changes, deposit competition and funding costs, interest-rate movements, further credit deterioration, investment-security impairment and the recoverability of collateral and deferred tax assets. The Bank’s 200-basis-point upward rate-shock model projected a 7.3% increase in net interest income but a 0.5% decline in net portfolio value; these estimates depend on assumptions and are not forecasts.
  • Management reported effective internal control over financial reporting as of September 30, 2011. Independent auditors issued an unqualified opinion on the FY2011 and FY2010 financial statements.

Important facts for investors to verify

  • Whether non-performing assets, potential problem loans, restructurings and OREO continue to decline—and whether the allowance remains adequate as collateral values and local conditions evolve.
  • Compliance with both regulatory MOUs, the Bank’s capital and liquidity requirements, and any subsequent regulator actions or approval conditions.
  • The status and amount of unpaid TARP preferred dividends, the Treasury’s director-appointment right, and the preferred dividend step-up and redemption constraints.
  • The quality and valuation of private-label mortgage-backed securities, MSRs and foreclosed assets, including future impairment or valuation adjustments.
  • Whether deposit growth, loan demand, net interest margin and commercial real-estate credit performance support sustainable profitability.