Timberland Bancorp, Inc. — Form 10-Q
Reporting period: Three months ended December 31, 2013 (the company’s fiscal first quarter of 2014). The unaudited consolidated results cover Timberland Bancorp and its community-banking subsidiary, Timberland Bank, which operates in western Washington.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2013 | Comparable period |
|---|---|---|
| Net interest income | $6.46 million | $6.39 million |
| Net interest margin | 3.78% | 3.78% |
| Non-interest income | $2.20 million | $2.72 million |
| Non-interest expense | $6.24 million | $6.38 million |
| Net income | $1.61 million | $1.71 million |
| Net income to common shareholders | $1.41 million | $1.44 million |
| Diluted earnings per common share | $0.20 | $0.21 |
- At December 31, 2013, total assets were $727.93 million, down 2.4% from September 30, 2013. Net loans were $555.90 million, up 1.4%; deposits were $601.48 million, down 1.1%.
- Cash and cash equivalents were $66.24 million, down from $94.50 million at fiscal year-end. FHLB advances remained $45.00 million. Shareholders’ equity was $79.09 million, down 11.8%, primarily following the redemption of the remaining Series A preferred shares for $12.07 million.
- Operating cash flow was $2.85 million; investing cash flow was negative $12.01 million and financing cash flow was negative $19.09 million. Cash and cash equivalents declined $28.26 million during the quarter.
- The efficiency ratio was 72.12%, compared with 70.05%; return on average assets was 0.87%, versus 0.92%, and return on average equity was 7.28%, versus 7.53%.
- The allowance for loan losses was $10.75 million, or 1.90% of loans receivable and loans held for sale, and 75% of non-performing loans. The company recorded no loan-loss provision, compared with $0.20 million a year earlier; net charge-offs increased to $0.39 million from $0.26 million.
Material changes and management commentary
- Net income declined 5.7% year over year. Management attributed the decrease mainly to lower non-interest income, partly offset by higher net interest income, no loan-loss provision, and lower non-interest expense.
- Non-interest income fell 19.2%, principally because loan-sale gains declined by about $0.34 million and the prior-year $0.25 million mortgage-servicing-rights valuation recovery did not recur. Loan-sale volume also decreased as refinance activity slowed.
- Net interest income increased 1.1% while the margin held steady. Lower deposit and certificate-of-deposit costs reduced interest expense, offsetting weaker yields on interest-earning assets.
- Commercial real estate and construction lending drove loan growth. Commercial loans represented 50.8% of the loan portfolio; construction and land-development loans increased to $53.69 million from $45.14 million at September 30.
- Non-performing assets rose to $28.87 million, or 3.97% of assets, from $27.95 million, or 3.75%. Non-accrual and 90-days-past-due loans were 2.52% of loans, compared with 2.51%. Non-accrual land loans increased to $5.37 million from $2.15 million. OREO increased to $12.48 million.
- Management reported a 14.45% regulatory liquidity ratio. The Bank had $141.31 million of additional FHLB borrowing availability and $39.36 million available from its Federal Reserve borrowing line; no Federal Reserve line balance was outstanding. Loan commitments were $38.31 million, with $21.36 million in undisbursed construction loans. CDs maturing within one year totaled $101.45 million.
- Both the holding company and Bank exceeded applicable regulatory capital requirements. The Bank’s Tier 1 leverage ratio was 9.72%, Tier 1 risk-based capital ratio was 12.64%, and total risk-based capital ratio was 13.90%.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue, margin, or loan-growth guidance. Management stated that quarter results are not necessarily indicative of full-year results.
- Key disclosed risks include deterioration in real estate and commercial credit, allowance adequacy, interest-rate and funding changes, deposit retention, loan demand and loan-sale conditions, regulatory actions and changes, competition, cost control, fair-value estimates, cybersecurity, and litigation.
- The preferred-stock redemption was a significant capital and cash use. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in market-risk disclosures.
- Management reported no events indicating potential goodwill impairment at quarter-end, while noting that valuation assumptions are judgmental and future impairment cannot be ruled out. The allowance estimate is also subject to uncertainty and regulatory review.
- Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether non-performing assets, especially land and commercial real estate exposures, stabilize and whether OREO can be sold without further losses.
- Whether the allowance remains adequate as loan growth continues and net charge-offs exceed the prior-year quarter.
- Whether deposit trends and the $101.45 million of CDs maturing within one year affect funding costs and liquidity.
- Whether lower refinancing activity continues to reduce loan-sale gains and servicing-related income.
- The effects of the preferred-stock redemption on capital, cash availability, and future common-shareholder earnings.