Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2019; filed May 10, 2019. Amounts are in U.S. dollars. The company is a Washington community bank holding company. Results include South Sound Bank, acquired October 1, 2018, so year-over-year comparisons reflect the acquisition as well as underlying performance.
Financial performance
| Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Six months ended March 31, 2019 | Six months ended March 31, 2018 |
|---|---|---|---|---|
| Net interest income | $12.73 million | $9.62 million | $25.07 million | $19.06 million |
| Non-interest income | $3.94 million | $3.08 million | $7.21 million | $6.22 million |
| Net income | $6.11 million | $4.27 million | $11.73 million | $7.88 million |
| Diluted earnings per share | $0.72 | $0.57 | $1.39 | $1.05 |
| Net interest margin | 4.51% | 4.19% | 4.49% | 4.19% |
| Efficiency ratio | 55.66% | 56.83% | 55.27% | 56.96% |
Quarterly net income rose 43.2%; six-month net income rose 48.8%. Management attributed the improvement mainly to higher net interest income and non-interest income, including merger-related growth and a BOLI death benefit, and a lower effective tax rate. Higher operating expenses partly offset the gains. There was no loan-loss provision in either comparative period.
Financial position, cash flow, and credit
- At March 31, 2019, assets were $1.24 billion, net loans $873.28 million, deposits $1.07 billion, and shareholders’ equity $162.34 million. Since September 30, 2018, these increased 21.8%, 20.4%, 20.5%, and 30.2%, respectively, primarily reflecting the South Sound merger.
- Six-month cash flow: $9.70 million provided by operating activities, $11.65 million used in investing activities, and $27.67 million provided by financing activities. Cash and cash equivalents ended at $174.59 million. Cash, cash equivalents, and investment CDs totaled $240.32 million.
- Deposits were the principal reported funding source; the filing reports no outstanding balance on the FRB or PCBB borrowing lines. It reports $300.01 million of additional FHLB borrowing capacity, subject to available collateral. The Bank’s regulatory liquidity ratio was 25.05%.
- The Bank was well-capitalized. Its reported total risk-based capital ratio was 18.38%, versus a 10.00% well-capitalized threshold; its capital conservation buffer was 10.38%.
- Non-performing assets were $5.09 million, or 0.41% of assets, versus $3.64 million, or 0.36%, at September 30, 2018. Non-accrual loans increased to $2.75 million from $1.32 million. The allowance for loan losses was $9.74 million, or 1.10% of loans; acquired-loan credit discounts are not included in that allowance.
Material changes, outlook, and risks
- The October 2018 South Sound Bank acquisition expanded the company’s presence along Washington’s I-5 corridor. Consideration was $35.17 million, including $28.27 million in stock and $6.90 million in cash; the acquisition added $9.48 million of goodwill and $2.48 million of core deposit intangible. Acquired operations contributed $1.51 million of pretax income in the quarter and $2.70 million for the six months, as reported, with certain integrated costs excluded.
- Management expected approximately $700,000 of additional merger-related conversion expenses over the next two quarters, associated with integrating branches and systems. It also cited expected future cost savings and revenue synergies; the filing gives no quantified earnings guidance or formal forecast.
- A BOLI death benefit generated approximately $1.00 million of non-interest income in the six-month period and contributed to the year-over-year income increase. The claim also resulted in a $3.05 million receivable, including return of cash surrender value and death-benefit income.
- Key risks identified include successful merger integration and customer/employee retention; credit deterioration, especially in real estate and commercial lending; interest-rate and deposit-cost changes; competition and economic conditions; regulatory actions; and technology, cybersecurity, and third-party service disruptions. Management said the allowance was adequate but noted that future losses or regulatory review could require an increase.
- Management reported no material change in market-risk disclosures or previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of March 31, 2019.
Important facts for investors to verify
- How much of earnings growth is sustainable after separating South Sound’s contribution, the BOLI death benefit, acquired-loan discount accretion, and tax-rate effects.
- Whether merger integration meets the expected timetable and whether the planned conversion costs and anticipated synergies materialize.
- Trends in non-accrual loans, delinquencies, non-performing assets, and the allowance, taking account of acquired-loan credit discounts.
- Net interest margin and deposit costs as interest rates and funding competition change.
- Liquidity and capital capacity after planned lending commitments, including the $91.30 million of loan commitments and $94.47 million of undisbursed construction loans.