Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2017, the first quarter of fiscal 2018. Comparisons of operating results are to the three months ended December 31, 2016; balance-sheet comparisons are to September 30, 2017. The company operates Timberland Bank, a community bank serving western Washington. Figures are unaudited.
Financial performance and position
- Earnings: Net income was $3.61 million, up 14.8% year over year. Diluted earnings per share were $0.48 versus $0.43; dividends were $0.11 per share versus $0.09.
- Net interest income and margins: Net interest income rose 13.5% to $9.43 million. Net interest margin increased to 4.19% from 3.91%; interest-earning asset yield was 4.45% versus 4.31%, while the cost of interest-bearing liabilities declined to 0.38% from 0.54%.
- Other income and expenses: Non-interest income fell 2.5% to $3.14 million, mainly as loan-sale gains declined. Non-interest expense increased 5.4% to $7.18 million, including higher payroll and OREO costs. The efficiency ratio improved to 57.08% from 59.07%. Return on average assets was 1.50% versus 1.39%; return on average equity was 12.90% versus 12.87%.
- Balance sheet: Total assets rose 4.4% from September 30 to $993.90 million. Net loans increased 2.2% to $705.27 million, and deposits rose 4.6% to $876.07 million. Shareholders’ equity increased 2.8% to $114.11 million.
- Cash flow and liquidity: Operating cash flow was $5.76 million; investing activities used $25.17 million; financing activities provided $37.43 million. Cash and cash equivalents increased $18.02 million to $166.21 million. Cash and investment CDs totaled $219.74 million, and the regulatory liquidity ratio was 25.47%. The Bank reported no FHLB, Federal Reserve or PCBB borrowing outstanding at quarter-end; disclosed available borrowing capacity included $268.20 million from the FHLB and $71.19 million from the Federal Reserve.
- Debt and capital: No FHLB borrowings were outstanding at December 31. The Bank reported regulatory capital ratios of 11.16% leverage, 16.04% common equity Tier 1 and 17.29% total capital, and was categorized as well-capitalized.
- Asset quality: Non-performing assets were $5.50 million, or 0.55% of assets, down from $5.75 million and 0.60% at September 30. Non-accrual loans increased to $2.11 million from $1.91 million; total delinquent and non-accrual loans were $3.12 million. The allowance for loan losses was $9.57 million, 1.34% of loans and 452.7% of non-performing loans. There was no loan-loss provision in either comparative quarter.
Material changes and unusual items
- Quarterly earnings improved primarily from higher net interest income, including the absence of $307,000 of FHLB borrowing expense recorded in the prior-year quarter. Higher loan and interest-bearing deposit yields also contributed.
- Deposits increased by $38.18 million, including a $28.70 million commercial customer deposit made in December. Management expected most of that deposit to be withdrawn during January 2018, making the quarter-end funding increase potentially temporary.
- The Tax Cuts and Jobs Act led to a one-time $548,000 tax expense to revalue net deferred tax assets. The lower blended federal tax rate for fiscal 2018 reduced quarterly tax expense by approximately $551,000 versus a 35% rate, substantially offsetting that charge. The reported effective tax rate was 33.01%.
- OREO and repossessed assets declined $414,000 after two property dispositions, but related quarterly expense increased due partly to write-downs on two real estate properties and one personal property.
- Commercial real estate loans represented 41.8% of gross loans. Management said unrealized investment-security losses were temporary and that it had the ability and intent to hold affected securities until recovery.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management expected available funding to cover current loan commitments. At quarter-end, loan commitments were $65.14 million and undisbursed construction loans were $79.45 million; $74.18 million of CDs were scheduled to mature within one year.
Management identified risks including borrower credit deterioration and real-estate values, changes in interest rates and deposit costs, loan demand and secondary-market conditions, competition, regulatory actions, operating expenses, and information-technology or third-party service disruptions. Management considered the allowance adequate but cautioned that future deterioration or regulatory review could require a material increase. It anticipated that adoption of the expected-credit-loss standard (CECL) could increase the allowance, with the amount not yet determined. No material legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the large commercial deposit was withdrawn as anticipated and how deposit balances and funding costs subsequently changed.
- Whether loan growth, particularly in commercial real estate and construction lending, affected credit quality, delinquencies, non-accrual loans or allowance needs.
- How the Tax Act’s deferred-tax remeasurement and lower tax rate affect subsequent-period effective tax rates and earnings.
- Whether net interest margin remains supported as market rates and deposit pricing change, and as loan and deposit balances reprice.
- The eventual CECL adoption impact on reserves and capital, and continued compliance with regulatory capital and liquidity requirements.