Timberland Bancorp: Rapid Bottom-Line Expansion Makes For A Compelling Case

Timberland Bancorp (TSBK) is a 22 branch bank located in the state of Washington. The bank is a small community oriented bank focusing on real estate mortgage loans and commercial lending.

Location map

Source: Company Homepage

Turnaround Based on Rapid Bottom-Line Expansion

There is a lot to like about Timberland Bancorp. First, the company is your classic turnaround story. In 2008, the company was part of the Troubled Asset Relief Program (TARP). In the program, the company received $16.64 million from the US Treasury Department. Subsequently, the company sold 16,641 shares of Fixed Rate Cumulative Perpetual Preferred Stock and related warrants to purchase 370,899 shares of the company’s common stock at $6.73/share.

In the year of 2012, the Treasury Department sold the preferred units to other investors, relieving the TARP restrictions on Timberland Bancorp. Furthermore, the warrants were sold to private investors as (there is still a 5% dilution/warrant overhang present).

Then in 2013, the company purchased and retired 4,576 shares of the preferred stock; below liquidation value. Later in 2013, the company redeemed the remaining 12,065 shares of its preferred units. The company is now banking/cash-flowing ~$832,000 that it does not go directly to preferred holders.

Secondly, the company is experiencing rapid bottom-line expansion. From 2011-2014, Timberland Bancorp’s bottom-line has increased from $1,171 million to $6,062 million. This is a remarkable 50.83% annualized return. Even better, in the FY of 2015, the company pulled in $9,206 in net income; a 51.8% increase YOY. Finally, 2Q16, the bottom-line jumped up 62% YOY.

Michael R. Sand, the CEO of Timberland Bancorp stated the following in regards to record breaking Q2 results…

“The financial results of the first half of our current fiscal year compare very favorably to the results posted last year for the comparable period with our ROA up 40%, our ROE up 43% and our efficiency ratio improving to 64.21% from 75.78%.  Net interest margin increased during the first half of our current fiscal year to 3.96% from 3.78% for the comparable period one year prior.  With steady balance sheet growth and significant and ongoing improvements in asset quality, we are continuing to produce and retain earnings while paying appropriate dividends to increase value for our shareholders.”   

An expanding bottom-line doesn’t derive itself from risky loan practices either. In fact, since 2009, non-current loans to loans have fallen from a high 7.51% to a low 0.85%.

With a rapidly expanding bottom-line and asset quality turnaround, the company initiated their first dividend in 2014. The dividend has continued to increase as well. In 2014 they paid $0.16/share. By 2015, the company was paying $0.24/share. With the recent increase in the quarterly to $0.08/share, the company should (ceteris paribus) pay a $0.32/share dividend in FY 2016.

Timberland Bancorp also has an attractive repurchase program to unlock shareholder value as well. For an example, in the first six months of 2016, Timberland Bancorp has bought back 66,000 shares at $820,000 (~$12.42/share). Furthermore, the company can still buy back 221,893 shares under its existing plan.

buy back yield

Using CompleteBankData’s software, we can see that Timberland Bancorp has a buyback yield of 1.41%.

If the stock price continues to trend upward, the buyback program is not warranted. However, at the current price, a buyback makes sense.

Timberland Bancorp also performs better than the majority of its peers.

comps

A decreasing efficiency ratio, an increasing ROE and ROA, an expanding bottom-line and better performance statistics than the majority of its peers, makes Timberland Bancorp an interesting security to follow.

If the company continues to increase their profitability metrics, while continuing to focus on shareholder value, Timberland Bancorp could be a great community bank investment. In addition, the absolute small market cap, coupled with the somewhat, ‘hidden stock’, let’s Timberland Bancorp fly way off the radar of the Street.

Conclusion

With a rapidly growing bottom-line and a management team focused on the creation of shareholder valued (dividends and repurchases), there is a lot to like about this bank. As the bank continues to outperform, value will slowly be recognized. Furthermore, the relative comparison and increasing asset base suggests that Timberland Bancorp will continue to grow, subsequently expanding their bottom-line. In my opinion, I find Timberland Bancorp to be a very interesting community bank that will be put on my watch-list.

 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Nick Bodnar

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