TIMBERLAND BANCORP INC quarterly report, Q3 FY2013

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Timberland Bancorp, Inc. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2013; balance-sheet comparisons are to September 30, 2012. Financial statements are unaudited. The company operates Timberland Bank, a community bank serving western Washington.

Financial performance and condition

  • Quarter: Net interest income was $6.50 million, down 1.9% year over year; provision for loan losses was $1.39 million, up from $0.90 million. Net income was $876,000 versus $1.35 million; net income to common shareholders was $678,000, or $0.10 per diluted share, versus $1.08 million, or $0.16.
  • Nine months: Net interest income was $19.33 million, up 0.7%; provision for loan losses was $2.76 million versus $2.60 million. Net income was $3.86 million versus $3.44 million. Net income to common shareholders was $3.32 million, or $0.48 per diluted share, versus $2.64 million, or $0.39.
  • Interest margin: Net interest margin was 3.88% for the quarter, down from 3.96%; for the nine months it was 3.83%, up from 3.80%. Nine-month interest income declined 4.8%, while interest expense declined 27.2% as deposit costs fell.
  • Other income and costs: Nine-month non-interest income rose 8.1% to $7.87 million, led by loan-sale gains and a $475,000 MSR valuation recovery. Non-interest expense fell 0.5% to $18.80 million; quarterly expense increased 2.3% to $6.24 million. Nine-month efficiency ratio was 69.12%, versus 71.34%.
  • Balance sheet: Total assets were $732.78 million, down 0.6%; net loans were $545.29 million, up 1.3%; deposits were $596.06 million, down 0.3%. Shareholders’ equity was $89.23 million, down 1.2%. Cash and cash equivalents were $82.55 million, down from $96.67 million.
  • Credit quality: Allowance for loan losses was $11.13 million, or 2.00% of loans receivable and loans held for sale, and management said it was adequate. Non-performing assets were $29.63 million, or 4.04% of assets, down from $38.27 million, or 5.19%. Non-accrual and 90-days-past-due loans totaled $11.99 million, down from $22.53 million. OREO and repossessed assets increased to $15.31 million from $13.30 million. Accruing troubled debt restructurings totaled $18.96 million.
  • Cash flow and funding: Nine-month operating cash flow was $7.62 million; investing cash use was $13.69 million and financing cash use was $8.05 million. Cash declined $14.12 million. FHLB advances remained $45.00 million; no repurchase agreements remained outstanding. The bank reported a 16.9% regulatory liquidity ratio, $139.35 million of additional FHLB borrowing availability and $52.77 million available from the Federal Reserve Bank.
  • Capital: The bank reported Tier 1 leverage capital of 11.13%, Tier 1 risk-based capital of 14.60%, and total risk-based capital of 15.85%; it exceeded applicable regulatory requirements.

Material changes and notable items

  • Commercial real estate loans increased $33.99 million, while construction and land development loans fell $17.49 million and land loans fell $7.98 million. Management said several commercial construction projects converted to permanent financing and that it continued reducing land-related exposure.
  • Quarterly earnings declined as higher loan-loss provision and non-interest expense combined with lower net interest income. Nine-month earnings improved, supported by non-interest income growth, lower expenses and slightly higher net interest income.
  • During the nine months, the company repurchased and retired 4,576 Series A preferred shares for $4.32 million, recording a $255,000 discount benefit to common earnings, partly offset by accelerated discount accretion. The Treasury’s sale of the preferred shares and warrant to private investors did not provide proceeds to the company. The Federal Reserve rescinded the company’s Memorandum of Understanding in January 2013.
  • Goodwill remained $5.65 million. The fiscal 2013 impairment test resulted in no impairment charge; the analysis relied on valuation methods and assumptions that management said involve significant judgment.

Outlook, risks and contingencies

The filing provides no specific earnings or financial guidance. Management noted that higher mortgage rates may reduce future loan-sale volumes as refinancing activity declines. Risks include loan-credit deterioration, real estate values and OREO exposure, interest-rate and funding changes, deposit retention, regulatory actions and changes, competition, and the accuracy of fair-value and allowance estimates. Management cautioned that interim and nine-month results are not necessarily indicative of full-year results. No material legal proceedings were reported.

Investor verification points

  1. Review subsequent credit performance, charge-offs, reserve adequacy, non-performing assets, OREO dispositions and troubled debt restructurings.
  2. Assess whether the commercial real estate concentration and growth offset continued reductions in construction, land development and land exposures.
  3. Check whether deposit trends, upcoming certificate maturities and available borrowing capacity support liquidity and planned loan commitments.
  4. Evaluate sustainability of loan-sale gains and MSR valuation recoveries, particularly given management’s warning about potentially weaker mortgage refinancing.
  5. Verify capital and preferred-stock developments, and the assumptions underpinning the goodwill impairment test.