Business context and reporting period
Timberland Bancorp, Inc. is a Washington bank holding company operating primarily through Timberland Bank, a community bank with 22 branches in western Washington. Its lending is concentrated in real estate. This Form 10-K covers the fiscal year ended September 30, 2012; the filing metadata’s “2012 Q4” should not be read as a standalone quarterly filing. The filing does provide unaudited fourth-quarter results.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total assets, period-end | $737.0 million | $738.2 million |
| Deposits, period-end | $597.9 million | $592.7 million |
| Net loans receivable, including loans held for sale | $538.5 million | $528.0 million |
| Shareholders’ equity, period-end | $90.3 million | $86.2 million |
| Net interest income | $25.7 million | $25.4 million |
| Non-interest income | $9.8 million | $8.7 million |
| Provision for loan losses | $3.5 million | $6.8 million |
| Non-interest expense | $25.6 million | $26.0 million |
| Net income | $4.6 million | $1.1 million |
| Net income per diluted common share | $0.52 | $0.00 |
- Net interest margin was 3.81%, up from 3.78%; return on average assets was 0.62% and return on average equity was 5.21%. The efficiency ratio improved to 72.15% from 76.11%.
- Net charge-offs were $3.6 million, down from $6.1 million; the allowance for loan losses was $11.8 million, or 2.15% of loans and 52.48% of non-performing loans.
- Cash flow from operations was $15.4 million; investing activities used $24.0 million and financing activities used $6.8 million. Cash and cash equivalents ended at $96.7 million, down $15.4 million year over year.
- Borrowings included $45.0 million of FHLB advances and $0.9 million of repurchase agreements. The Bank reported $58.0 million of unused FRB borrowing capacity and $214.8 million of available borrowing capacity through the FHLB and FRB. Its regulatory liquidity ratio was 20.31%.
- The Bank was reported as well capitalized. Its Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 10.9%, 14.5% and 15.8%, respectively. The Company’s corresponding reported ratios were 11.7%, 15.5% and 16.8%.
Fourth-quarter results
For the quarter ended September 30, 2012, net interest income was $6.5 million, provision for loan losses was $0.9 million, non-interest income was $2.5 million, non-interest expense was $6.7 million, and net income was $1.2 million. Net income to common shareholders was $0.9 million, or $0.13 per basic and diluted share.
Material changes versus the prior comparable period
- Annual net income increased $3.5 million, primarily reflecting a $3.3 million reduction in loan-loss provision, higher non-interest income, slightly higher net interest income, and lower non-interest expense.
- Loan originations rose 42.5% to $228.3 million, including increased commercial real estate, multifamily and residential refinance activity. Fixed-rate one- to four-family loan sales rose to $97.4 million from $62.5 million.
- Net loans rose 2.0%; deposits rose 0.9%. Cash and cash equivalents declined, while other real estate owned (OREO) increased 23.0% to $13.3 million.
- Non-accrual loans edged down to $21.3 million from $21.6 million, while total non-performing assets rose to $38.3 million from $37.0 million, or 5.19% of assets. Potential problem loans declined to $43.5 million from $61.1 million.
- Commercial real estate loans were $256.3 million, 45.1% of the loan portfolio. Construction, land-development and land loans together remained a meaningful credit exposure despite the Bank’s effort to reduce speculative and land lending.
Outlook, management commentary, risks and unusual items
- Management’s strategy emphasizes resolving problem assets, growing core deposits, selling fixed-rate residential mortgages, and disciplined growth in commercial and multifamily lending. It provided no specific fiscal 2013 earnings or revenue guidance.
- The FDIC and Washington DFI rescinded the Bank MOU on December 12, 2012, after fiscal year-end. The Federal Reserve MOU applicable to the holding company remained in effect at the filing date, restricting dividends, capital distributions, stock repurchases and certain other actions absent approval or non-objection.
- The Treasury sold the Company’s 16,641 Series A preferred shares to new owners on November 13, 2012. The transaction provided no proceeds and did not change capital; Treasury retained a warrant for up to 370,899 common shares at $6.73 per share, exercisable through December 23, 2018. The preferred dividend rate is 5% through December 23, 2013, then 9% until redemption.
- The Company paid preferred dividends that had been in arrears and was current at September 30, 2012. It paid no common dividends during FY 2012; future common dividends remain uncertain and restricted.
- Key risks include Washington real estate and economic weakness; concentrated commercial real estate and other real-estate lending; collateral valuation and allowance adequacy; non-performing loans and OREO; interest-rate and liquidity risk; regulatory restrictions; and the potential effect of proposed Basel III capital rules. Management’s rate model estimated net interest income would rise 6.7% under an immediate 200-basis-point increase and fall 4.4% under a 100-basis-point decrease; these are model estimates, not forecasts.
- Unusual or judgment-sensitive items included a $214,000 net other-than-temporary impairment charge on securities, $1.0 million of OREO valuation losses, and a $205,000 tax benefit from a deferred-tax valuation allowance recovery. Goodwill of $5.7 million was not impaired.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an opinion on internal control.
Most important facts for investors to verify
- Whether the holding-company MOU has been modified or rescinded, and what approvals remain necessary for dividends, redemptions or repurchases.
- Subsequent trends in non-performing assets, impaired and restructured loans, OREO dispositions, charge-offs and allowance coverage—particularly for commercial real estate, land and construction exposures.
- Whether the $13.3 million OREO balance and $43.5 million of potential problem loans result in further write-downs or credit provisions.
- Deposit retention, liquidity capacity and funding costs, including the maturity and renewal of $131.7 million of certificates of deposit due within one year.
- The preferred stock’s 9% step-up in December 2013, redemption feasibility and potential dilution from the Treasury warrant.
- Actual effects of final regulatory capital rules and any changes in local real estate, employment or housing conditions.