Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2013; financial statements are unaudited. The filing covers the three- and six-month periods ended March 31, 2013, compared with the corresponding 2012 periods. Timberland Bank is the company’s community banking business in western Washington.
Financial performance and condition
| Metric | Quarter ended March 31, 2013 | Comparable 2012 period | Six months ended March 31, 2013 | Comparable 2012 period |
|---|---|---|---|---|
| Net interest income | $6.44 million | $6.27 million | $12.83 million | $12.57 million |
| Net income | $1.28 million | $0.81 million | $2.99 million | $2.09 million |
| Net income to common shareholders | $1.20 million | $0.54 million | $2.64 million | $1.56 million |
| Diluted earnings per common share | $0.17 | $0.08 | $0.39 | $0.23 |
| Net interest margin | 3.83% | 3.72% | 3.80% | 3.73% |
| Non-interest income | $2.78 million | $2.49 million | $5.49 million | $4.94 million |
| Non-interest expense | $6.18 million | $6.57 million | $12.56 million | $12.79 million |
Balance sheet at March 31, 2013: Total assets were $738.12 million; net loans $546.79 million; deposits $601.59 million; shareholders’ equity $88.53 million. FHLB advances were $45.00 million and repurchase agreements $0.55 million. Cash and cash equivalents were $85.80 million, down from $96.67 million at September 30, 2012.
Cash flow and liquidity: For the six months, operating cash flow was $2.42 million, investing cash outflow was $11.67 million, and financing cash outflow was $1.62 million. The reported regulatory liquidity ratio was 17.4%. At period-end, the Bank reported $172.26 million available under its FHLB facility and $54.38 million available from the Federal Reserve, subject to collateral and facility terms. Loan commitments were $29.48 million, with $12.16 million of undisbursed construction loans. CDs maturing within one year totaled $121.2 million.
Credit and capital: Non-performing assets were $37.90 million, or 5.14% of assets, versus $38.27 million, or 5.19%, at September 30, 2012. Non-accrual and 90-days-past-due loans were $20.61 million, or 3.69% of loans, compared with $22.53 million, or 4.09%. The allowance for loan losses was $11.31 million, equal to 2.03% of loans and loans held for sale and 54.9% of non-performing loans. The company and Bank exceeded applicable regulatory capital requirements; the Bank’s total risk-based capital ratio was 15.59%.
Material changes versus comparable periods
- Quarterly net income rose 58.2%; six-month net income rose 42.9%. Management attributed the improvement to higher net interest income, higher non-interest income, and lower non-interest expense; the six-month comparison also benefited from a lower loan-loss provision.
- Net interest income increased as lower funding costs more than offset lower interest income. For the quarter, interest expense declined 27.4%, while interest income declined 3.2%; the six-month margin increased to 3.80% from 3.73%.
- Non-interest income growth reflected higher gains from sales of fixed-rate residential loans and MSR valuation recoveries. Six-month MSR recoveries were $475,000, and the company said no valuation allowance remained for future recovery.
- Quarterly provision for loan losses increased to $1.18 million from $1.05 million, and quarterly net charge-offs increased to $1.63 million from $758,000. For the six months, provision declined to $1.38 million from $1.70 million, while net charge-offs rose to $1.89 million from $1.38 million.
- Net loans increased $8.31 million from September 30, 2012, largely due to commercial real estate growth and construction projects converting to permanent financing. Land and construction/land-development exposures declined; commercial real estate represented 49.5% of the loan portfolio at March 31.
- OREO and other repossessed assets increased 13.0% to $15.03 million. The company recorded $619,000 of OREO valuation losses during the six months.
- Deposits increased 0.6%, with growth in transaction, savings and money-market accounts partly offset by an $18.15 million decline in CDs. The Bank reported no brokered deposits.
Outlook, risks and unusual items
- The filing provides no quantified earnings or financial guidance. Management said it expected to have sufficient funds to meet current loan commitments; interim results are not necessarily indicative of full-year results.
- The Bank and company supervisory memoranda of understanding were rescinded in December 2012 and January 2013, respectively. Despite the company MOU’s rescission, Federal Reserve approval remained necessary for further Series A preferred-stock repurchases.
- During the quarter, the company repurchased and retired 4,576 preferred shares for $4.32 million. A $255,000 discount to par increased income attributable to common shareholders, partly offset by $62,000 of accelerated discount accretion. This transaction materially affected common earnings and equity.
- Risks highlighted include loan-credit deterioration, housing and commercial real estate conditions, allowance adequacy, interest-rate and funding changes, deposit retention, loan-sale market conditions, regulatory actions and changes, operating costs, fair-value estimates, and technology or cybersecurity failures.
- Management reported no material legal proceedings, no material changes in market-risk disclosures, and effective disclosure controls as of March 31, 2013. Management said there were no circumstances indicating potential goodwill impairment at that date, but noted future impairment cannot be ruled out.
Important facts for investors to verify
- Whether improving non-performing loan ratios persist and whether elevated charge-offs require additional provisioning; review loan concentrations, collateral values, and the $23.84 million troubled-debt-restructured portfolio.
- How much earnings growth is sustainable without the preferred-stock repurchase discount and MSR valuation recoveries, and whether gains from loan sales continue.
- Whether deposit retention and available borrowing capacity remain adequate as $121.2 million of CDs mature within one year and loan commitments are funded.
- Whether commercial real estate concentration, OREO growth and valuation assumptions, or private-label mortgage-backed securities produce further losses.
- The terms and any approvals for future preferred-stock repurchases, and the effect of preferred dividends and the Treasury warrant on common-shareholder returns and dilution.