Timberland Bancorp: The Current Pullback Makes The Stock Attractive

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Timberland Bancorp, Inc. remains undervalued, trading at around 10 times earnings with a robust net interest income and low loan loss provisions.The bank's liquid balance sheet and conservative loan ...

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Kirk Fisher Introduction Timberland Bancorp, Inc. (NASDAQ:TSBK) is a small regional bank in Washington State with a total asset base of just under $2B. I have been following the company for a while now, and in my most recent article, which was published in May, I argued the bank was trading too cheap. The share price has moved up by XXX since then, but I still think the bank is relatively cheap. Its financial year ends in September, so we should see the full-year results in the next few months. However, I wanted to dig in the 9M 2024 results to see if I need to update my investment thesis after the share price increase. You can read all my older articles on Timberland Bancorp here. Data by YCharts The low loan loss provisions result in a very robust earnings profile One of the main reasons why the bank is still performing well is its robust net interest income result. In the third quarter of FY 2024 (which ended on September 30th), the total interest and dividend income increased by $4.25M on a YoY basis while the interest expenses increased by approximately $4.9M. While this indeed still means the net interest income decreased by approximately $0.65M on a YoY basis, that actually is a pretty good result compared to some of its peers.   TSBK Investor relations As you can see on the income side of the income statement above, the bank also allocated $0.24M in loan loss provisions, bringing the YTD loan loss provisions to $0.66M. That’s lower than a year ago, as the bank’s loan book remains pretty robust. Meanwhile, the total non-interest income remains pretty low at just around $2.8M. Considering the bank’s non-interest expenses remain relatively high at $11.1M, it is clear Timberland Bancorp definitely needs a strong net interest income to fund its non-interest expenses.   TSBK Investor relations And despite the higher amount of net non-interest expenses, the total pre-tax income remained pretty robust at almost $7.5M. This ultimately resulted in a net income of $5.9M, which represents an EPS of $0.74. Keep in mind, the bank continues to buy back its shares and only had 7.97M shares outstanding when it filed the quarterly report. This won’t have an impact on the Q3 EPS of $0.74. However, if I would use the current share count to calculate the 9M 2024 EPS, the EPS would actually be higher, at $2.25 compared to the $2.22/share on a reported basis which used the weighted average share count. Looking at the balance sheet, the bank maintains a pretty liquid balance sheet, with almost $160M in cash and cash equivalents and around $250M in securities and certificates of deposit.   TSBK Investor relations I’m mainly interested in the $1.4B loan book, given its 7% expansion in the past nine months as the bank preferred to reduce its securities portfolio in favor of underwriting more loans. As you can see below, the majority of the loans are backed by real estate, with a pretty heavy allocation to commercial real estate.   TSBK Investor relations Although Timberland runs a pretty conservative loan portfolio and although the bank has a history of keeping loan losses relatively limited, I obviously wanted to take a closer look at the loan portfolio. We need to see what percentage of the loans are past due and no longer accruing. And the results are better than I had expected. As of the end of June, only $4.2M of the loans were classified as past due. And although commercial real estate makes up almost 50% of the entire loan book, it represents just 30% of the total amount of loans past due. The commercial business loans actually put in the weakest performance, with just over $2M in loans past due. This represents over 1.5% of the total allocation to business loans, while the $1.3M in loans past due in the commercial real estate portfolio represents less than a quarter of a percent.   TSBK Investor relations While the total amount of loans past due is substantially higher than the $1.7M as of the end of the previous financial year, the vast majority (approximately 2/3rd) of the increase can be found in the commercial business loan segment. Although the bank’s net income is pretty strong, the dividend is still relatively low, as the bank currently pays a quarterly dividend of $0.24 per share. I expect this number to increase, but any increase will likely be relatively minimal, perhaps by one cent to $0.25 per share. This means Timberland Bancorp will be able to continue to buy back stock. In the first nine months of its financial year, it spent $4.8M on share buybacks. While that will certainly help the per-share performance, the repurchases have a slightly negative impact on the book value and tangible book value per share. This is because the regional bank is buying back stock at a premium to its tangible book value. At the end of June, the total amount of equity on the balance sheet was $241.2M, and divided over 7.95M shares outstanding, the book value was approximately $30.33 per share. However, the balance sheet also contains $15.65M in goodwill and core deposit intangibles, which make up about $1.96 per share. This means the tangible book value was approximately $28.36 per share. I don’t mind Timberland paying a small premium over its tangible book value to buy back stock. Given the low dividend payout ratio, the bank is retaining around $2/share per year in equity, which would get integrally added to the book value per share (at least for the portion that’s not used to buy back stock). Investment thesis Timberland Bancorp remains relatively cheap. The stock is currently trading at just around 10 times earnings, but the continuously decreasing share count will have a positive impact on the per-share performance. The bank is also trading at an attractive level from a P/TBV perspective, which means that even after the recent share price increase, the stock actually remains attractive. The tangible book value will likely reach the $30 mark by the end of next year.  I still have a small long position and would still like to expand this position.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2472064173"}