Timberland Bancorp, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. This is an annual report, not a calendar-year fourth-quarter filing; selected results for the quarter ended September 30, 2019 are noted below. Timberland Bancorp is a Washington bank holding company operating Timberland Bank, a 24-branch community bank serving western Washington.
Financial performance and condition
| Metric | FY2019 / September 30, 2019 | Prior comparable period |
|---|---|---|
| Total assets | $1.247 billion | $1.018 billion |
| Net loans | $886.7 million | $725.4 million |
| Deposits | $1.068 billion | $889.5 million |
| Net interest income | $51.16 million | $39.06 million |
| Non-interest income | $14.34 million | $12.54 million |
| Net income | $24.02 million | $16.72 million |
| Diluted EPS | $2.84 | $2.22 |
| Net interest margin | 4.50% | 4.23% |
| Return on average assets / equity | 1.96% / 14.91% | 1.70% / 14.27% |
| Efficiency ratio | 54.32% | 56.55% |
- Net income rose 43.7%; diluted EPS increased 27.9%. The company reported no loan-loss provision in either FY2019 or FY2018. FY2019 net recoveries were $160,000, versus net charge-offs of $23,000 in FY2018.
- Cash from operating activities was $18.1 million; investing activities used $44.5 million; financing activities provided $20.6 million. Cash and cash equivalents declined $5.85 million to $143.0 million.
- No FHLB borrowings were outstanding. The bank reported $295.67 million of available FHLB borrowing capacity and $84.36 million of unused FRB capacity; its regulatory liquidity ratio was 23.2%.
- Shareholders’ equity was $171.1 million, or 13.71% of assets. The bank was “well capitalized,” with a 12.47% leverage ratio, 18.10% CET1 and Tier 1 risk-based ratios, and a 19.28% total capital ratio.
Material changes versus FY2018
- The October 1, 2018 South Sound Bank acquisition materially increased scale. Assets, loans and deposits grew 22.5%, 22.2% and 20.1%, respectively; much of the increase came from acquired balances. Acquired loans contributed $121.5 million and deposits $151.5 million at acquisition.
- Net interest income increased 31.0%, reflecting acquisition-related balance growth and higher asset yields; interest expense also rose 64.3% as deposit costs increased. Average loan yield increased to 5.59% from 5.31%, while the average cost of interest-bearing deposits rose to 0.59% from 0.43%.
- Non-interest expense rose 21.9%, including higher staffing, data-processing and facility costs, partly related to the acquisition and core-system conversion. The efficiency ratio nevertheless improved.
- Non-performing loans increased to $3.03 million from $1.32 million; non-performing assets rose to $5.01 million from $3.64 million. Delinquent loans and substandard loans also increased. The allowance was $9.69 million, 1.08% of loans versus 1.30% a year earlier; acquired loans carried a remaining fair-value discount of $1.39 million, which is not included in allowance coverage ratios.
Outlook, management commentary, risks and unusual items
- Management’s strategy is to grow commercial real estate, construction and commercial business lending, expand core deposits, manage problem assets, control expenses and pursue expansion opportunities. The filing provides no specific earnings or growth guidance.
- Credit exposure is concentrated in real estate: commercial real estate loans were $419.1 million, or 42.3% of the portfolio; construction loans were $223.5 million, or 22.5%. Management identifies regional economic weakness, collateral values, construction execution and borrower cash flow as key credit risks. The bank stated all construction loans were performing at year-end.
- FY2019 included $1.03 million of BOLI death-benefit income, which helped increase non-interest income and reduce the effective tax rate. Acquired-loan discount accretion added $645,000 to interest income. Acquisition-related expenses were $462,000 in FY2019. FY2018 included a $548,000 one-time tax expense to remeasure deferred taxes following federal tax reform.
- Interest-rate sensitivity modeling estimated that an immediate 100-basis-point increase would raise projected net interest income about 4.1%, while a 100-basis-point decrease would reduce it about 6.9%; management cautions that the model depends on assumptions and is not a forecast.
- Other disclosed risks include deposit competition and repricing, acquisition integration, CRE concentration and local economic conditions, LIBOR transition, cybersecurity and third-party service-provider disruption, and regulatory changes. Marijuana-related businesses supplied $31.43 million, or 2.9%, of deposits.
- The company anticipated adopting lease accounting rules in FY2020, with an estimated $2.9 million increase to assets and liabilities and no expected material income-statement impact. It expects CECL adoption to increase the loan-loss allowance, but the amount was not yet known.
- The auditor issued an unqualified opinion on the financial statements and internal control; management also concluded internal control over financial reporting was effective. The filing reports no material pending litigation.
Fourth-quarter snapshot
For the quarter ended September 30, 2019, net income was $6.34 million and diluted EPS was $0.75. Net interest income was $13.15 million and non-interest income was $3.60 million.
Important facts for investors to verify
- How much of FY2019’s earnings growth reflects South Sound Bank versus organic growth, and whether expected acquisition synergies and integration benefits are being realized.
- Whether the rise in non-accrual, delinquent and substandard loans continues, particularly in commercial real estate, construction and commercial business lending; assess allowance adequacy alongside the acquired-loan fair-value discount.
- Whether net interest margin holds up as deposit costs reprice and market rates change, including actual results versus management’s interest-rate sensitivity assumptions.
- How the company’s liquidity and deposit base evolve, including the maturity of certificates of deposit, brokered funding, and deposits associated with marijuana-related businesses.
- Whether the BOLI death benefit and acquired-loan discount accretion materially flatter reported earnings relative to ongoing operating performance, and the eventual CECL effect on reserves and capital.