Timberland Bancorp: A Strong Buy

Upward estimate revisions on the back of strong fiscal fourth quarter results – including an earnings surprise of 18.2% – have helped Timberland Bancorp Inc. ( TSBK ) achieve a Zacks #1 Rank (Strong Buy) on January 1. With a solid return of 68.4% in the last year, this banking service provider hit a new 52-week high on December 26.

The Rank Drivers

Better-than-expected fiscal fourth quarter results, improving credit quality and strong capital ratios are the primary rank drivers for this stock.

Timberland Bancorp reported its fiscal fourth quarter (ended September 30) results on November 8 with earnings per share of 13 cents, beating the Zacks Consensus Estimate of 11 cents by 18.2%. It also compared favorably with the year-ago loss of 5 cents. Robust results for the reported quarter were primarily aided by higher non-interest income, elevated net interest income and reduced provision for loan losses.

Non-interest expenses, which increased 1.5% on a year-over year basis to $6.7 million, were a dampener for the quarter.

Net interest income increased 3.2% to $6.5 million from $6.3 million in the year-ago quarter. Net interest margin expanded 8 basis points on a year-over year basis to 3.83%. The rise was primarily due to lower cost of funds. Non-interest income jumped 31.6% year over year to $2.5 million. Provision for loan losses skidded 50.0% from the year-ago quarter to $0.9 million.

Credit quality continued to exhibit improvement. Non-accrual loans stood at $21.3 million, down 1.4% year over year. Net charge-offs during the quarter dipped 56.3% on a year-over-year basis to $0.7 million.

As of September 30, 2012, Timberland Bancorp's total risk-based capital ratio was 16.77%, Tier 1 risk-based capital ratio was 15.51% and Tier 1 leverage capital ratio was 11.66%, improving from 16.46%, 15.19% and 11.09%, respectively, in the prior-year quarter.

Earnings Estimate Revisions

The Zacks Consensus Estimate for fiscal 2013 moved up by 5.5% to 58 cents over the last 60 days. This reflects a year-over-year improvement of about 11.5%.

Attractive Valuation

Shares of Timberland Bancorp currently trade at 11.5x 12-month forward earnings, a 28% discount to the peer group average of 15.9x. Its price to book ratio of 0.6 is at a 25% discount to the industry median of 0.8.

Moreover, the company has a trailing 12-month ROE of 6.0%, compared with the industry average of 3.9%. This implies that the company reinvests its earnings more efficiently than its industry peers.

About the Company

Headquartered in Hoquiam, Washington, Timberland Bancorp operates as the bank holding company for Timberland Bank. It operates through 22 branches located in Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties of Washington and offers an array of banking services. The company, which was founded in 1915, has a market capitalization of roughly $48.9 million.

Other Zacks #1 Rank bank stocks include Sun Bancorp Inc. ( SNBC - Snapshot Report ) and Pacific Continental Corp. ( PCBK - Snapshot Report ) .