Timberland Bancorp, Inc. — FY2016 Form 10-K
Business context and period. Community bank holding company operating through Timberland Bank, with 22 branches in western Washington. Fiscal year ended September 30, 2016; comparisons are with FY2015 unless noted. The bank focuses on real estate, commercial business and consumer lending. All figures below are consolidated unless identified otherwise.
Financial performance and position
| Metric | FY2016 / September 30, 2016 | Prior comparable |
|---|---|---|
| Total assets | $891.4 million | $815.8 million; up 9.3% |
| Net loans receivable | $663.1 million | $604.3 million; up 9.7% |
| Deposits | $761.5 million | $678.9 million; up 12.2% |
| FHLB borrowings | $30.0 million | $45.0 million |
| Shareholders’ equity | $96.8 million; 10.86% of assets | $89.2 million; 10.93% of assets |
| Net interest income | $30.8 million | $27.3 million; up 12.9% |
| Net interest margin | 3.88% | 3.80% |
| Net income | $10.2 million; diluted EPS $1.43 | $8.3 million; diluted EPS $1.17 |
| Operating cash flow | $11.7 million | $7.6 million |
Net income rose 22.5%. Interest and dividend income increased 11.9%, while interest expense rose 4.7%; non-interest income grew 14.4% to $10.9 million and non-interest expense increased 3.1% to $26.6 million. Return on average assets was 1.19%, return on average equity 11.00%, and the efficiency ratio improved to 63.89% from 70.22%.
Cash and cash equivalents were $108.9 million, with an additional $53.0 million in investment CDs. Cash and cash equivalents increased $16.7 million during the year; investing activities used $59.5 million and financing activities provided $64.5 million. The regulatory liquidity ratio was 20.6%. The bank reported $235.4 million of available FHLB borrowing capacity and $60.4 million available on its Federal Reserve borrowing line. It was categorized as well-capitalized: CET1 14.3%, Tier 1 risk-based 14.3%, total risk-based capital 15.6%, and leverage 10.3%.
Credit quality improved: non-performing assets declined to $7.9 million, or 0.88% of assets, from $15.0 million, or 1.84%. Non-accrual and 90-days-past-due loans were $3.0 million; the allowance for loan losses was $9.8 million, or 1.46% of loans. Potential problem loans not already reported as non-performing were $17.1 million. Commercial real estate was 43.2% of total loans; construction was 17.0%.
Material changes and unusual items
- Loan growth was led by custom and owner/builder construction, commercial real estate, multifamily, commercial business and consumer lending. Deposits grew mainly in transaction, money-market and savings accounts.
- FY2016 had no loan-loss provision or recapture, versus a $1.5 million recapture in FY2015. FY2016 recorded $98,000 of net charge-offs, compared with $1.0 million of net recoveries in FY2015.
- The bank repaid $15.0 million of FHLB borrowing early and incurred a $138,000 prepayment penalty. Total FHLB borrowings fell to $30.0 million.
- Non-interest income included a one-time $262,000 debit-card issuer incentive. The bank also recorded $168,000 of net other-than-temporary impairment on investment securities; $734,000 of private-label mortgage-backed securities remained on non-accrual.
- OREO and other repossessed assets fell 47.6% to $4.1 million, including $435,000 of valuation write-downs and $3.8 million of dispositions. The company paid $2.6 million in common dividends and repurchased $820,000 of shares.
Outlook, commentary and risks
No specific earnings or growth guidance is provided. Management describes recovery in its markets as modest and uneven, and plans to grow core deposits, diversify lending, limit speculative construction and land lending, sell longer-term fixed-rate mortgages, and continue resolving problem assets. Management’s interest-rate model estimated that an immediate 100-basis-point rate increase would raise projected net interest income 4.1%, while a 100-basis-point decrease would reduce it 4.7%; these are model estimates, not forecasts.
Key risks include concentration in Washington real estate lending, particularly commercial real estate and construction; borrower and collateral sensitivity to local economic conditions; potential deterioration in credit quality and allowance estimates; deposit competition and funding costs as rates rise; and interest-rate, liquidity, regulatory and cybersecurity risks. Management identified a commercial real estate concentration under supervisory guidance. Deposits from state-legal marijuana-related businesses were $17.1 million, or 2.2% of total deposits, with related regulatory uncertainty. The company reported no material pending legal proceedings. Independent auditors issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether commercial real estate and construction growth, including borrower and geographic concentrations, remains within prudent risk limits.
- Trends in the $17.1 million of potential problem loans, $8.2 million of troubled debt restructurings, and allowance adequacy as loan balances grow.
- Deposit retention and repricing exposure, particularly the $88.1 million of certificates of deposit maturing within one year and the effect of rising funding costs.
- Future credit losses or valuation changes in OREO and private-label mortgage-backed securities, including the securities on non-accrual.
- Whether reported earnings growth is sustained without the one-time card incentive or unusually favorable credit and asset-disposition effects.
- Capital and liquidity capacity after planned lending, dividends and repurchases, and the effects of regulatory changes and marijuana-account requirements.