Business context and reporting period
Timberland Bancorp, Inc. is the holding company for Timberland Bank, a community bank operating in western Washington. This unaudited Form 10-Q covers the fiscal first quarter ended December 31, 2019; income and cash-flow comparisons are with the three months ended December 31, 2018. Balance-sheet comparisons are with September 30, 2019. Amounts below are in U.S. dollars; financial statement figures are shown in millions unless noted.
Financial performance and condition
| Metric | Period-end / Q1 FY2020 | Comparison |
|---|---|---|
| Total assets | $1,270.5 million | Up 1.9% from September 30, 2019 |
| Net loans receivable | $913.2 million | Up 3.0% from September 30, 2019 |
| Total deposits | $1,084.5 million | Up 1.5% from September 30, 2019 |
| Shareholders’ equity | $175.7 million | Up 2.7% from September 30, 2019 |
| Net interest income | $13.0 million | Up 5.3% year over year |
| Net income | $6.65 million | Up 18.5% year over year |
| Diluted earnings per share | $0.78 | Compared with $0.66 |
| Net interest margin | 4.43% | Compared with 4.47% |
| Efficiency ratio | 49.43% | Improved from 54.85% |
Interest and dividend income was $14.19 million, up 6.6%; interest expense rose 22.5% to $1.19 million. The $0.20 million loan-loss provision compared with none in the prior-year quarter. Non-interest income increased 20.6% to $3.94 million, helped by higher loan-sale gains and debit-card interchange fees. Non-interest expense declined 2.2% to $8.37 million. The effective tax rate was 20.50%, versus 20.33%.
Return on average assets was 2.12%, versus 1.88%, and return on average equity was 15.40%, versus 14.56%. The $0.25 quarterly dividend per share was up from $0.23.
Cash and cash equivalents ended the quarter at $118.9 million, down from $143.0 million at September 30. Cash, cash equivalents and investment CDs together were $195.1 million, down 11.9%. Operating activities provided $9.4 million; investing activities used $47.9 million, principally reflecting loan growth and securities purchases; financing activities provided $14.3 million, largely from deposit growth. Cash and cash equivalents decreased by $24.2 million during the quarter.
The filing reports no outstanding balance on the Federal Reserve borrowing line or the $10 million PCBB overnight line; $367.3 million of additional FHLB borrowing capacity was available, subject to collateral. The Bank’s regulatory liquidity ratio was 19.97%. It was classified as well-capitalized; its reported total risk-based capital ratio was 19.13% and leverage ratio was 12.69%. No separate funded debt balance is reported in the summarized balance sheet.
Material changes and credit quality
Loan originations increased 24.6% year over year to $132.6 million, driven by mortgage refinancing and several larger commercial real estate and business loans. Loan sales rose 114.4% to $34.6 million, and gains on loan sales increased to $953,000 from $386,000. Commercial real estate and commercial business lending drove much of the quarter’s loan growth. Management attributed higher net interest income mainly to a 6.2% increase in average interest-earning assets; increased deposit costs partly offset that benefit.
The allowance for loan losses was $9.88 million, or 1.07% of loans receivable, compared with $9.69 million, or 1.08%, at September 30. Non-performing assets were $4.98 million, or 0.39% of assets, versus $5.01 million, or 0.40%. Non-accrual loans were $3.07 million, up from $1.59 million a year earlier; loans 30 or more days past due totaled $3.87 million, up 18.9% year over year. Management considered the allowance adequate but cautioned that future deterioration or regulatory review could require an increase. The acquired South Sound loan portfolio had a remaining fair-value discount of $1.24 million, which is not included in the allowance.
Outlook, risks, contingencies and unusual items
The filing provides no specific earnings or growth guidance. Management said excess liquidity was deployed into loans and higher-earning securities and expected available funding to meet current loan commitments. At quarter-end, loan commitments were $103.6 million, undisbursed construction loans were $82.2 million, and certificates of deposit maturing within one year totaled $94.5 million.
Management anticipates that adoption of the expected-credit-loss standard (CECL) will increase the allowance, but the amount was not yet known; adoption was scheduled for a later fiscal year. Effective October 1, 2019, the Company adopted lease-accounting requirements, recording $2.82 million of operating lease assets and liabilities at quarter-end for three branch leases. The filing also identifies interest-rate, credit, real-estate, deposit-retention, competition, regulatory, technology and South Sound integration risks. Management reported no material change in previously disclosed risk factors or market-risk information, no material legal proceedings, and effective disclosure controls.
Investment securities available for sale had $163,000 of gross unrealized losses at December 31. Management viewed the declines as temporary, citing market rates and spreads, and said it intended and expected to be able to hold the securities until recovery. The quarter included a $99,000 gain from selling land acquired in the South Sound transaction and a $67,000 South Sound-related expense. There were no share repurchases during the quarter.
Important facts for investors to verify
- Whether loan growth—particularly commercial real estate and commercial business lending—continues without further deterioration in delinquencies, non-accrual loans or collateral values.
- Whether the $9.88 million loan-loss allowance remains adequate, including how the $1.24 million acquired-loan discount and future CECL estimates affect credit coverage.
- Whether funding costs continue to rise and how that affects the 4.43% net interest margin, which declined year over year.
- Whether loan-sale gains and refinancing-driven mortgage activity remain at current levels, given their contribution to non-interest income.
- The timing and eventual allowance impact of CECL adoption, and the Bank’s capacity to meet loan commitments and deposit maturities under changing liquidity conditions.
- Whether unrealized securities losses recover as management expects and whether South Sound integration produces the anticipated operating benefits.