Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. The financial statements are unaudited. Unless stated otherwise, figures are in millions of dollars. Comparisons are with the corresponding 2018 periods or September 30, 2018 balance-sheet date.
Business context and material changes
Timberland Bancorp is a community bank operating primarily in western Washington. On October 1, 2018, it completed its acquisition of South Sound Bank to expand along Washington’s I-5 corridor. The acquisition materially increased the scale of the business, so reported year-over-year growth reflects both acquired operations and organic performance.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 | Balance at June 30, 2019 |
|---|---|---|---|
| Net income | $5.96 (2018: $4.42) | $17.69 (2018: $12.30) | |
| Diluted earnings per share | $0.70 (2018: $0.59) | $2.09 (2018: $1.64) | |
| Net interest income | $12.94 (2018: $9.73) | $38.01 (2018: $28.79) | |
| Net interest margin | 4.49% (2018: 4.18%) | 4.49% (2018: 4.19%) | |
| Assets | $1,247.31 | ||
| Net loans receivable | $873.98 | ||
| Deposits | $1,072.54 | ||
| Shareholders’ equity | $166.27 |
Quarterly non-interest income was $3.54 versus $3.15 a year earlier; non-interest expense was $8.97 versus $7.12. The efficiency ratio improved to 54.43% from 55.33%. Return on average assets was 1.93% and return on average equity was 14.56%. For the nine months, the respective ratios were 1.94% and 14.86%.
For the nine months, operating cash flow was $17.57; investing activities used $22.11; financing activities provided $26.52; and cash and cash equivalents rose $21.97 to $170.84. Cash and cash equivalents plus investment CDs totaled $252.02. The Bank reported a 24.93% regulatory liquidity ratio. It had $294.12 of additional FHLB borrowing capacity and $84.02 available from the Federal Reserve; no Federal Reserve or Pacific Coast Bankers’ Bank line borrowings were outstanding. The filing does not provide a clear total debt balance.
The Bank exceeded regulatory capital requirements and was classified as well-capitalized. Its leverage ratio was 12.11%, common equity Tier 1 and Tier 1 risk-based ratios were 17.41%, total risk-based capital was 18.58%, and its capital conservation buffer was 10.41%.
Changes versus comparable periods
- Quarterly net income rose 34.9%; nine-month net income rose 43.8%. Management attributed the gains mainly to higher net interest income and non-interest income, as well as lower effective tax rates; acquisition-driven scale contributed substantially.
- Quarterly net interest income increased 33.0%, while average interest-earning assets grew 24.0%. Asset yield rose to 4.92%, while deposit cost increased to 0.64% from 0.45%.
- Assets increased 22.5%, net loans 20.5%, and deposits 20.6% from September 30, 2018, primarily due to South Sound. Acquisition consideration included $28.27 of stock and $6.90 cash; $9.48 of goodwill was recorded.
- Non-performing assets increased to $5.37 from $3.64, or 0.43% of assets versus 0.36%. Non-accrual loans rose to $3.35 from $1.32. The allowance for loan losses was $9.63, or 1.09% of loans and 287.5% of non-performing loans.
- No loan-loss provision was recorded in either the current or comparable periods. Nine-month net recoveries were $0.10, compared with net charge-offs of $0.02 in 2018.
Outlook, risks, and unusual items
- No earnings or revenue guidance was provided. Management expected approximately $0.45 of additional acquisition-related conversion expense in the quarter ending September 30, 2019, as acquired branches moved to the company’s core processing platform.
- Nine-month results included a $1.03 BOLI death-benefit claim, which increased non-interest income and contributed to a lower effective tax rate. The nine-month effective tax rate was 19.42%, compared with 26.04% in 2018.
- Management said the allowance was adequate but warned that actual credit losses, economic deterioration, collateral values, or regulatory review could require higher reserves. Non-accrual loans and non-performing assets increased; commercial real estate and construction lending are significant portfolio exposures.
- Other identified risks include merger integration and realizing anticipated synergies, deposit competition and funding costs, interest-rate changes, technology conversion and cybersecurity, regulation, and the adoption of the expected-credit-loss standard (CECL). Management anticipated the allowance could increase under CECL, but had not quantified the impact.
- Management determined goodwill was not impaired at May 31, 2019; future impairment remains possible. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Separate acquisition-related growth from organic loan, deposit, and earnings growth; assess progress on South Sound integration, cost savings, and the planned systems conversion.
- Track the rise in non-accrual loans and non-performing assets, commercial real estate and construction concentrations, and reserve adequacy. Consider the $1.57 remaining acquired-loan fair-value discount when comparing allowance coverage.
- Assess whether net interest margin can hold as deposit costs rise, and whether liquidity and borrowing capacity remain sufficient as loan commitments of $96.31 and construction draws of $93.18 are funded.
- Evaluate earnings quality, including the BOLI death benefit, acquired-loan discount accretion, acquisition expenses, and tax-rate effects; these may not recur at the same level.
- Confirm the expected $0.45 of conversion expense, CECL adoption impact, and any changes to the company’s capital, dividend, or repurchase plans.