Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016. Balance-sheet comparisons are against September 30, 2015. Amounts are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context
Timberland Bancorp is the holding company for Timberland Bank, a community bank serving western Washington through 22 branches. Its lending is primarily real-estate-related, including commercial real estate, residential and construction loans. Results are principally driven by net interest income, credit quality, deposit funding and loan-sale activity.
Key financial metrics
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Net interest income | $7.67 million, up 16.8% year over year | $15.38 million, up 15.9% |
| Non-interest income | $2.51 million, up 13.5% | $5.03 million, up 16.0% |
| Non-interest expense | $6.63 million, down 0.4% | $13.11 million, up 1.4% |
| Net income | $2.38 million, up 64.0%; diluted EPS $0.34 versus $0.21 | $4.91 million, up 54.4%; diluted EPS $0.69 versus $0.45 |
| Net interest margin | 3.92%, versus 3.69% | 3.96%, versus 3.78% |
| Return on average assets / equity | 1.13% / 10.42% | 1.18% / 10.84% |
Quarterly income before taxes was $3.56 million; the federal tax provision was $1.18 million, an effective rate of 33.05%. No loan-loss provision was recorded in either the quarter or six-month period. The six-month cash-flow statement reported $6.94 million of operating cash flow, $20.25 million used in investing activities and $31.05 million provided by financing activities, producing a $17.74 million increase in cash and cash equivalents.
At March 31, total assets were $851.96 million, up 4.4% from September 30; net loans were $622.85 million, up 3.1%; deposits were $712.04 million, up 4.9%; and shareholders’ equity was $92.26 million, up 3.4%. Cash and cash equivalents were $110.03 million, and CDs held for investment were $52.52 million. FHLB advances were unchanged at $45.00 million. The allowance for loan losses was $10.04 million, or 1.59% of loans receivable, which management stated covered 285% of non-performing loans.
Material changes and management commentary
- Net interest income benefited from growth in average interest-earning assets and higher loan yields. The quarter included $193,000 of prepayment penalties and $46,000 of non-accrual interest collections; together these added approximately 12 basis points to net interest margin. For the six-month period, such collections totaled $720,000, versus $162,000 a year earlier.
- Non-interest income growth reflected higher service charges, card interchange fees, loan-sale gains and servicing income. Management attributed some checking-account service-charge growth to accounts associated with Washington’s marijuana industry.
- Loan originations rose 7.4% to $113.33 million for the six months. Fixed-rate one- to four-family loan sales increased 26.9% to $26.56 million. Net loans grew, particularly commercial business and construction loans; multi-family and land loans declined.
- Asset quality improved: non-performing assets fell to $9.85 million from $14.98 million, and the ratio to total assets declined to 1.16% from 1.84%. Non-accrual loans were $3.39 million, versus $6.04 million at September 30. Accruing troubled debt restructurings declined to $7.92 million from $12.49 million; there were no new restructurings during the six months.
- OREO and other repossessed assets declined 30.5% to $5.46 million, largely after disposition of eight properties. Total non-performing assets include $868,000 of non-accrual investment securities.
- Deposits funded balance-sheet growth. Cash and cash equivalents plus investment CDs rose to $162.55 million. The Bank’s regulatory liquidity ratio was 22.79%; management reported $199.34 million of additional FHLB borrowing availability, $45.04 million available from the Federal Reserve, and an unused $10 million overnight line with Pacific Coast Bankers’ Bank.
- The Bank exceeded regulatory capital requirements and was classified as well-capitalized. Its reported actual ratios included a 10.26% leverage ratio, 13.80% common equity Tier 1 ratio and 15.05% total capital ratio.
Outlook, risks and unusual items
The filing provides no quantified earnings, margin or growth guidance. Management cautions that interim results are not necessarily indicative of full-year results. Key disclosed risks include borrower credit deterioration, real-estate values and local economic conditions, interest-rate and funding changes, loan demand and secondary-market conditions, deposit retention, regulatory actions, competition, operating costs, cybersecurity and third-party service-provider risks.
Unusual or notable items include $23,000 of net other-than-temporary impairment recognized in earnings on investment securities for the quarter and six months. Management said the unrealized security losses were primarily market-rate and spread-related, considered temporary, and that it had the ability and intent to hold the relevant securities through recovery. The company repurchased 66,000 shares for $820,000 during the quarter at an average $12.42 per share; 221,893 shares remained under the repurchase plan. No material legal proceedings or material changes to previously disclosed risk factors were reported. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether earnings and margin gains persist without the quarter’s unusually high prepayment-penalty and non-accrual-interest collections.
- Credit trends in the real-estate-heavy loan portfolio, including commercial real estate, construction, land and troubled restructurings, and the adequacy of the allowance if conditions weaken.
- The sustainability and cost of deposit growth, the level of brokered deposits, and funding needs as $90.94 million of CDs mature within one year.
- Interest-rate sensitivity, FHLB advance call features and maturities, and the effect of rate changes on asset yields, deposit costs and liquidity.
- Progress and realized value from OREO dispositions, loan sales and the remaining share-repurchase authorization.