Timberland Bancorp, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2011; balance-sheet comparisons are with September 30, 2010. The filing describes a community bank operating in western Washington through 22 branches. Amounts below are in U.S. dollars; financial statement figures are generally in thousands unless stated otherwise.
Financial performance and position
| Metric | Q3 / June 30, 2011 | Comparable period / prior balance |
|---|---|---|
| Net interest income | $6.41 million for the quarter; $19.10 million for nine months | $6.39 million and $19.23 million, respectively, in 2010 |
| Net interest margin | 3.76% for the quarter; 3.78% for nine months | 3.85% and 3.91% in 2010 |
| Net income (loss) | Quarter: $(1.28) million; nine months: $1.16 million | Quarter: $804,000; nine months: $(2.15) million in 2010 |
| Net income (loss) to common shareholders | Quarter: $(1.55) million, or $(0.23) per diluted share; nine months: $370,000, or $0.05 per diluted share | Quarter: $543,000, or $0.08 per diluted share; nine months: $(2.93) million, or $(0.44) per diluted share |
| Assets / equity | Total assets $735.02 million; shareholders’ equity $86.33 million | $742.69 million and $85.41 million at September 30, 2010 |
| Cash and cash equivalents | $114.30 million | $111.79 million at September 30, 2010 |
| Loans / allowance | Net loans $521.30 million; allowance for loan losses $11.79 million | Net loans $527.59 million; allowance $11.26 million at September 30, 2010 |
| Deposits / borrowings | Deposits $589.50 million; FHLB advances $55.00 million | $578.87 million and $75.00 million at September 30, 2010 |
For Q3, interest and dividend income fell 7.4% to $8.43 million, while interest expense declined 25.5% to $2.02 million. The $3.40 million loan-loss provision, up from $750,000, was the principal factor in the quarterly loss. Non-interest income was $1.76 million, down 9.3%; non-interest expense was $6.78 million, up 5.6%.
For the first nine months, interest and dividend income decreased 6.8% to $25.74 million and interest expense decreased 20.7% to $6.64 million. The provision for loan losses fell to $5.00 million from $8.55 million. Non-interest income rose 57.1% to $6.82 million, while non-interest expense increased 3.9% to $19.34 million.
Nine-month cash flows were $8.72 million provided by operating activities, $3.24 million provided by investing activities, and $9.44 million used in financing activities. Cash and cash equivalents increased $2.52 million from September 30, 2010. The bank reported a 22.18% regulatory liquidity ratio, $100.82 million available under its FHLB facility, and $55.98 million available under its FRB line, with no FRB balance outstanding. The filing says the bank expected to have sufficient funds for current loan commitments.
Material changes and credit quality
- Assets decreased 1.0% from September 30, 2010. Net loans declined 1.2%; commercial real estate loans increased $21.80 million, while land loans decreased $12.76 million. Deposits rose 1.8%, and FHLB advances fell by $20.00 million.
- Non-performing assets were $40.62 million, or 5.53% of total assets, broadly unchanged from $41.10 million and 5.53% at September 30, 2010. Loans 90 days or more past due and still accruing increased to $4.89 million from $1.33 million; the filing attributes much of the increase to two commercial real estate loans totaling $3.43 million that were secured and in collection.
- Impaired loans increased to $51.08 million from $42.25 million. Troubled debt restructured loans totaled $25.80 million, including $4.96 million on non-accrual status. The allowance equaled 2.21% of loans receivable and loans held for sale and 44.6% of non-performing loans, according to management.
- The Q3 provision increase followed updated appraisals showing lower values for three properties in two borrower relationships. Nine-month net charge-offs were $4.47 million, down from $11.82 million in 2010.
- Other-than-temporary impairment recognized in earnings on securities was $165,000 for the quarter and $336,000 for nine months, compared with $152,000 and $2.03 million in 2010. Q3 also included a $137,000 MSR valuation allowance; nine-month MSR income included a $703,000 valuation recovery.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management states that interim results are not necessarily indicative of full-year results.
- The Bank remained subject to a 2009 supervisory MOU requiring, among other things, Tier 1 leverage capital of at least 10% and prior regulatory non-objection for certain material balance-sheet changes. The Company was also subject to an FRB MOU restricting dividends, capital distributions, certain securities issuance, and stock repurchases without prior approval or non-objection. The Bank reported compliance with applicable capital requirements; its Tier 1 leverage ratio was 10.15%.
- The FRB had denied requests to pay five quarterly Series A preferred dividends due beginning May 15, 2010. Unpaid dividends in arrears were $1.04 million at June 30, 2011. The Treasury could appoint two directors if six quarterly payments were missed; common dividends were restricted until preferred dividend obligations were current.
- Key risks cited include further deterioration in real estate and borrower credit, adequacy of loan-loss reserves, interest-rate and funding changes, regulatory examinations and enforcement, deposit retention, securities valuation, and the ability to control expenses. Management cautions that future appraisals or economic conditions could require additional reserves. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Management concluded disclosure controls were effective as of June 30, 2011 and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track subsequent delinquencies, impaired and restructured loans, collateral appraisals, charge-offs, and whether the $11.79 million allowance remains adequate.
- Verify resolution and collection status of the two commercial real estate loans cited as driving the increase in 90-day accruing delinquencies.
- Monitor compliance with both supervisory MOUs, regulatory capital levels, and any change in restrictions on dividends or balance-sheet activity.
- Confirm the amount and treatment of accruing preferred dividends, the six-quarter director-appointment trigger, and restrictions on common dividends.
- Assess whether deposit growth, available borrowing capacity, and liquidity remain adequate alongside loan commitments and the $164.68 million of CDs scheduled to mature within one year.
- Review subsequent-period loan-loss provisions, securities impairments, and MSR valuations, which materially affected reported results.