Business context and reporting period
Timberland Bancorp, Inc. is the holding company for Timberland Bank, a community bank serving western Washington. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 31, 2017; comparisons are to the quarter and six months ended March 31, 2016 unless otherwise noted. Balance-sheet comparisons are to September 30, 2016. Dollar amounts below are in U.S. dollars.
Financial and operating highlights
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Net interest income | $8.45 million | $16.77 million |
| Net income | $3.13 million | $6.28 million |
| Diluted earnings per share | $0.42 | $0.86 |
| Net interest margin | 3.88% | 3.90% |
| Return on average assets | 1.35% | 1.37% |
| Return on average equity | 12.24% | 12.55% |
| Efficiency ratio | 60.67% | 59.86% |
- Quarterly earnings drivers: Net interest income rose 10.2% to $8.45 million; non-interest income rose 13.5% to $2.85 million. A $250,000 recapture of loan losses also benefited results. Non-interest expense increased 3.4% to $6.86 million.
- Six-month comparison: Net income increased 27.9% to $6.28 million. Net interest income rose 9.0% to $16.77 million, non-interest income increased 20.6% to $6.07 million, and non-interest expense increased 4.3% to $13.67 million. The $250,000 loan-loss recapture contrasts with no provision or recapture in the comparable period.
- Balance sheet at March 31: Total assets were $946.68 million, up 6.2% from September 30, 2016. Net loans were $676.08 million, up 2.0%; deposits were $808.85 million, up 6.2%; and shareholders’ equity was $104.83 million, up 8.3%. Commercial real estate loans were 43.5% of gross loans; mortgage loans overall were 88.7%.
- Cash flow and liquidity: Six-month operating cash flow was $4.14 million, investing cash flow was negative $13.85 million, and financing cash flow was positive $48.81 million. Cash and cash equivalents increased $39.10 million to $148.04 million; cash plus investment CDs totaled $200.97 million. The Bank reported a 24.01% regulatory liquidity ratio and $87.19 million of loan commitments, in addition to $59.72 million of undisbursed construction loans.
- Funding and debt: Deposits were the main source of balance-sheet growth. FHLB borrowings were $30.00 million at quarter-end, consisting of two $15 million advances. The company prepaid both advances on April 26, 2017, after quarter-end, and incurred a $282,000 penalty.
- Credit quality: Non-performing assets declined to $5.67 million, or 0.60% of assets, from $7.86 million, or 0.88%, at September 30, 2016. Non-accrual loans were $1.89 million; loans past due 30 days or more totaled $2.66 million. The $9.59 million allowance equaled 1.40% of loans receivable. TDR loans totaled $6.83 million, including $6.43 million on accrual status.
- Capital: The Bank was reported as well-capitalized. Its leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 10.36%, 14.97%, 14.97%, and 16.22%, respectively.
Material changes, outlook, and risks
- Management attributed higher net interest income mainly to growth in average interest-earning assets and lower borrowing costs. However, net interest margin declined year over year by 4 basis points for the quarter and 6 basis points for the six-month period, as asset yields fell.
- Loan originations increased 49.7% to $169.65 million for the six months. Loan sales rose 47.6% to $39.21 million, supporting gains on loan sales and asset-liability management.
- Service-charge growth partly reflected business checking accounts associated with Washington’s marijuana industry. Management stated these accounts were handled in accordance with applicable federal regulatory guidelines.
- Two TDR loans totaling $2.24 million were repaid after quarter-end. The company reported recovery of $1.06 million in previously charged-off amounts and receipt of $718,000 in non-accrual interest; these subsequent events did not affect the March quarter’s results.
- No quantitative earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Key risks include loan and real-estate credit quality, interest-rate and funding changes, deposit retention, competition, regulatory actions, operational and cybersecurity issues, and valuation estimates. Management said there were no material changes to previously disclosed risk factors or market-risk information.
- Management stated that disclosure controls were effective and that no material legal proceedings were pending. The filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $250,000 loan-loss recapture and improving non-performing asset trends are sustainable, and whether the allowance remains adequate as the loan portfolio grows.
- The effect of the April 26 FHLB prepayment and $282,000 penalty on subsequent-quarter earnings, liquidity, and interest expense.
- Loan portfolio concentration and exposure to commercial real estate, construction, and land lending, together with the level and terms of unfunded commitments.
- Whether margin pressure continues as loan yields decline and deposit costs respond to interest-rate changes.
- The durability and regulatory sensitivity of fee income from marijuana-industry accounts, loan sales, and other non-interest revenue.
- The dilution and capital effects of the January 2017 exercise of the 370,899-share warrant, and the company’s dividend and repurchase plans.