Timberland Bancorp: 100 bps interest rate will increase EPS by 20% (NASDAQ: TSBK)

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Introduction

Some of the smaller regional banks piqued my interest and I kept an eye on Timberland Bancorp (NASDAQ: TSBK) for about 18 months now. I have a small long position in Timberland Bancorp and I I was thinking of adding to this position on the current share price weakness, but decided to wait for the bank’s second quarter earnings release, just to make sure I could make an informed decision on the based on the most recent information and data.

Timberland Bancorp Pricing Chart
Data by Y-Charts

A good overview of the first half of 2022

In the second quarter of fiscal 2022 (which ends in March for Timberland Bancorp), the bank was able to increase its net interest income by approximately 2.5% to $12.9M thanks to interest income slightly higher (mainly thanks to an increased contribution from the yield on marketable securities) and a slightly lower interest expense.

income statement

Timberland Bancorp Investor Relations

The bank also recorded total non-interest income of $3.1 million, which was significantly lower than the first quarter of the previous year and was mainly due to TSBK reporting gains on the sale of loans in the second quarter of 2021 that did not repeat in the second quarter of the current fiscal year.

Operating expenses and revenues

Timberland Bancorp Investor Relations

Unfortunately, the total amount of non-interest expenses increased to $9.3 million, which means that the total amount of net non-interest expenses increased to $6.25 million, from less than $4 million in the second quarter of the prior year. This resulted in a pre-tax profit of $6.64M (the bank did not have to record provisions for loan losses) and a net profit of $5.33M, which is approximately $0.64 per share.

Turning to the first half of 2022 earnings, EPS was $1.30/share, primarily driven by slightly higher non-interest income in the first quarter. On an annualized basis, TSBK appears to remain on track to generate EPS above $2.50 per share, which translates to a forward P/E of around 10.

Timberland currently pays a quarterly dividend of $0.22/share for a yield of approximately 3.4%. The payout ratio is less than 35% based on second quarter earnings. Timberland therefore has many opportunities to continue to increase the dividend and to pay a special dividend from time to time.

Timberland Bank Branches

Timberland Bancorp Investor Relations

The balance sheet remains solid and fairly liquid

I’ve always been quite positive about Timberland’s balance sheet because the company has a very liquid balance sheet. I also wanted to take a closer look at the loan portfolio to ensure that Timberland is doing the right thing by recording no loan loss provisions in the first half of 2022.

On the balance sheet, Timberland has certainly allocated more cash to “normal” loans and investment securities, but with over $492 million in cash and $269 million in investment securities and certificates of deposit, the balance sheet remains exceptionally liquid. Of the total $1.88 billion in assets, approximately $750 million is held in cash or securities. This basically means that if clients were to withdraw 40% of their deposits, Timberland should have no problem achieving this as it can easily sell the investment securities.

Asset side of the balance sheet

Timberland Bancorp Investor Relations

While a very liquid balance sheet generally means that the bank is leaving gains on the table (normal loans have higher yields than investment securities), it also means that this bank should be relatively immune to a bank panic.

Of the $1.03 billion in net lending, $100 million represents outstanding construction loans that have not yet been disbursed. We also see that the bank has a decent exposure to residential mortgages, but commercial real estate loans still make up a very large portion of the loan book.

Distribution of the loan book

Timberland Bancorp Investor Relations

Interestingly, the total amount of loan loss provisions on the balance sheet is only $13.4 million. And that number has remained fairly stable as only a very small minority of the loan portfolio is currently classified as delinquent. As you can see below, less than $3 million in loans are past due, with only $2.65 million in loans classified as unaccrued.

Non-performing assets

Timberland Bancorp Investor Relations

Given that the current amount of provisions for loan losses is more than five times greater than the total amount of loans that are no longer accounted for on an accrual basis and nearly five times greater than all defaulted loans, I understand why Timberland Bancorp does not feel the need to further increase its loan loss provisions.

Investment thesis

At the end of the second quarter of 2022, Timberland Bancorp had total capital of $212.3 million and a tangible net worth of $197 million on the balance sheet. Spread across 8.3 million shares, that means Timberland’s tangible book value per share was around $23.60, meaning the bank is currently trading at just under 1.1 times its value. tangible accounting. Combined with the earnings multiple of just 10x FY2022 annualized EPS and the conservative balance sheet, I think I will further increase my position in this regional Washington state bank. The dividend is not high but I don’t mind a rather moderate but safe dividend.

The bank also acts as an attractive call option on interest rates. During the annual general meeting, TSBK revealed that a 100 basis point increase in the interest rate scenario add approximately $5.1M to net interest income and that would increase EPS by $0.50. In this case, Timberland has a good chance of generating over $3/share in earnings.

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