TIMBERLAND BANCORP, INC. As used in this Form 10-Q, the terms "we," "our" and "Company" refer toTimberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to "Bank" in this Form 10-Q, we are referring toTimberland Bank , a wholly-owned subsidiary ofTimberland Bancorp, Inc. , and the Bank's wholly-owned subsidiary,Timberland Service Corporation .
The following analysis discusses the material changes in the consolidated
financial condition and results of operations of the Company at and for the
three months ended
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war includingRussia's invasion ofUkraine , as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new variants of the novel coronavirus disease 2019 ("COVID-19"); credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; transition away from the London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by theBoard of Governors of theFederal Reserve System ("Federal Reserve") and of our bank subsidiary by theFDIC , theWashington State Department of Financial Institutions ,Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or 35 -------------------------------------------------------------------------------- impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules and including changes as a result of COVID-19; our ability to attract and retain deposits; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans in our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; the quality and composition of our securities portfolio and the impact if any adverse changes in the securities markets, including on market liquidity; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or theFinancial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism. and other external events on our business; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks described elsewhere in this Form 10-Q and in the Company's other reports filed with or furnished to theSecurities and Exchange Commission , including our 2022 Form 10-K. Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management's beliefs and assumptions at the time that they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal year 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company's consolidated financial condition and results of operations as well as its stock price performance.
Overview
Timberland Bancorp, Inc. , aWashington corporation, is the holding company forTimberland Bank . The Bank opened for business in 1915 and serves consumers and businesses acrossGrays Harbor ,Thurston ,Pierce ,King ,Kitsap andLewis counties,Washington with a full range of lending and deposit services through its 23 offices (including its main office inHoquiam ). AtDecember 31, 2022 , the Company had total assets of$1.84 billion , net loans receivable of$1.17 billion , total deposits of$1.60 billion and total shareholders' equity of$223.55 million . The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the unaudited consolidated financial statements and related data, relates primarily to the Bank's operations. The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans. The profitability of the Company's operations depends primarily on its net interest income after provision for (recapture of) loan losses. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest- 36 -------------------------------------------------------------------------------- bearing liabilities and the interest paid on those interest-bearing liabilities. Management attempts to maintain a net interest margin placing it within the top quartile of itsWashington State peers. Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders' equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. SinceMarch 2022 , in response to inflation, theFOMC of theFederal Reserve has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as ofDecember 31, 2022 . As it seeks to control inflation without creating a recession, theFOMC has indicated further increases are expected during calendar 2023. The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management's assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio. The Company recorded a$525,000 provision for loan losses for the three months endedDecember 31, 2022 primarily due to loan portfolio growth. There was no provision for loan losses for the three months endedDecember 31, 2021 . Net income is also affected by non-interest income and non-interest expense. For the three months endedDecember 31, 2022 , non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income. Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any. Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees,FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses. Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.
Results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Critical Accounting Policies and Estimates
The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company's 2022 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies and Estimates." That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company's critical accounting policies and estimates as previously disclosed in the Company's 2022 Form 10-K.
Comparison of Financial Condition at
The Company's total assets decreased by$24.96 million , or 1.3%, to$1.84 billion atDecember 31, 2022 from$1.86 billion atSeptember 30, 2022 . The decrease in total assets was primarily due to a decrease in total cash and cash equivalents, which was partially offset by increases in loans receivable and investment securities. Cash and cash equivalents were also used to fund the decrease in total deposits. Net loans receivable increased by$40.13 million , or 3.5%, to$1.17 billion atDecember 31, 2022 from$1.13 billion atSeptember 30, 2022 , primarily due to increases in one- to four-family loans, multi-family construction loans, commercial real estate loans and smaller increases in several other loan categories. These increases to net loans receivable were partially offset by an increase in the undisbursed portion of construction loans in process, and smaller decreases in several other loan categories. 37 -------------------------------------------------------------------------------- Total deposits decreased by$31.09 million , or 1.9%, to$1.60 billion atDecember 31, 2022 from$1.63 billion atSeptember 30, 2022 , primarily due to decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances. These increases were partially offset by increases in certificates of deposit account balances. Shareholders' equity increased by$4.98 million , or 2.3%, to$223.55 million atDecember 31, 2022 from$218.57 million atSeptember 30, 2022 . The increase in shareholders' equity was due to net income and proceeds from stock options exercised and was partially offset by the payment of dividends to common shareholders and the repurchase of common stock.
A more detailed explanation of the changes in significant balance sheet categories follows:
Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by$91.36 million , or 26.9%, to$248.29 million atDecember 31, 2022 from$339.65 million atSeptember 30, 2022 . The decrease was primarily a result of deploying overnight liquidity into higher-earning loan originations and investment securities, as well as to fund deposit withdrawals.Investment Securities : Investment securities (including investments in equity securities) increased by$26.41 million , or 8.6%, to$335.26 million atDecember 31, 2022 from$308.86 million atSeptember 30, 2022 . This increase was primarily due to the purchase of additionalU.S. government agency securities and mortgage-backed investment securities during the three months endedDecember 31, 2022 , as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period. These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
FHLB Stock: FHLB stock was
Other Investments: Other investments consist solely of the Company's investment in theSolomon Hess SBA Loan Fund LLC , which was unchanged at$3.00 million at bothDecember 31, 2022 andSeptember 30, 2022 . This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements. Loans: Net loans receivable increased by$40.13 million , or 3.5%, to$1.17 billion atDecember 31, 2022 from$1.13 billion atSeptember 30, 2022 . The increase was primarily due to a$24.17 million increase in one- to four- family loans, a$24.56 million increase in multi-family construction loans, a$5.92 million increase in commercial real estate loans and smaller increases in other categories. These increases were partially offset by a$8.93 million increase in the undisbursed portion of construction loans in process, and smaller decreases in several other categories. Loan originations decreased by$74.93 million , or 42.4%, to$101.67 million for the three months endedDecember 31, 2022 from$176.60 million for the three months endedDecember 31, 2021 . The decrease in loan originations was primarily due to a decrease in the amount of commercial real estate and one- to four-family loans originated. The decrease was partially offset by increases in multi-family loan originations. The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four-family mortgage loans decreased by$21.4 million , or 94.9%, to$1.16 million for the three months endedDecember 31, 2022 from$22.56 million for the three months endedDecember 31, 2021 , primarily due to decreased refinance activity for one- to four-family loans due to rising interest rates, declining homes sales and a decision to keep more single family loans originated during the quarter in the portfolio.
For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
Premises and Equipment: Premises and equipment decreased by
OREO (Other Real Estate Owned):. AtDecember 31, 2022 andSeptember 30, 2022 , total OREO and other repossessed assets consisted of two land parcels with no recorded value. 38 -------------------------------------------------------------------------------- BOLI (Bank Owned Life Insurance): BOLI increased by$156,000 or 0.7%, to$22.96 million atDecember 31, 2022 from$22.81 million atSeptember 30, 2022 . The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.Goodwill and CDI: The recorded amount of goodwill remained unchanged at$15.13 million at bothDecember 31, 2022 andSeptember 30, 2022 . CDI decreased by$68,000 , or 7.2%, to$880,000 million atDecember 31, 2022 from$948,000 atSeptember 30, 2022 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements." Loan Servicing Rights, Net: Loan servicing rights, net decreased by$253,000 , or 8.4%, to$2.77 million atDecember 31, 2022 from$3.02 million atSeptember 30, 2022 , primarily due to the amortization of servicing rights. The principal amount of loans serviced for Freddie Mac and the SBA decreased by$12.46 million to$422.75 million atDecember 31, 2022 from$410.29 million atSeptember 30, 2022 . Deposits: Deposits decreased by$31.09 million , or 1.9%, to$1.60 billion atDecember 31, 2022 from$1.63 billion atSeptember 30, 2022 . The decrease was primarily due to a$35.69 million decrease in non-interest bearing account balances, an$18.89 million decrease in money market account balances, a$3.71 million decrease in savings account balances and a$3.04 million decrease in NOW checking account balances. These decreases were partially offset by a$30.24 million increase in certificates of deposit account balances. Deposits consisted of the following atDecember 31, 2022 andSeptember 30, 2022 (dollars in thousands): December 31, 2022 September 30, 2022 Amount Percent Amount Percent Non-interest-bearing demand $ 494,370 30.9 % $ 530,058 32.5 % NOW checking 434,832 27.2 447,779 27.5 NOW checking - reciprocal 9,910 0.6 - - Savings 279,514 17.5 283,219 17.4 Money market 224,896 14.0 243,919 14.9 Money market - reciprocal 4,747 0.3 4,617 0.3 Certificates of deposit under$250 110,897 6.9 100,754
6.1
Certificates of deposit$250 and over 41,924 2.6 21,830 1.3 Total$ 1,601,090 100.0 %$ 1,632,176 100.0 % FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. There were no FHLB borrowings outstanding atDecember 31, 2022 andSeptember 30, 2022 . Shareholders' Equity: Total shareholders' equity increased by$4.98 million , or 2.3%, to$223.55 million atDecember 31, 2022 from$218.57 million atSeptember 30, 2022 . The increase was primarily due to net income of$7.51 million for the three months endedDecember 31, 2022 and$397,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of$2.64 million , and the repurchase of 10,570 shares of the Company's common stock for$348,000 (an average price of$32.88 per share). Asset Quality: The non-performing assets to total assets ratio was 0.12% atDecember 31, 2022 andSeptember 30, 2022 . Total non-performing assets decreased by$32,000 , or 1.5%, to$2.13 million atDecember 31, 2022 from$2.17 million atSeptember 30, 2022 . The decrease in non-performing assets was due to a$24,000 decrease in non-accrual loans and a$8,000 decrease in non-accrual investment securities.
The following table sets forth information with respect to the Company's
non-performing assets at
39
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2022 2022
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family (1) $ 383 $ 388
Commercial 658 657
Land 425 450
Consumer loans:
Home equity and second mortgage 263 255
Other 2 -
Commercial business loans 304 309
Total loans accounted for on a non-accrual basis 2,035 2,059
Accruing loans which are contractually past due 90 days or more - -
Total of non-accrual and 90 days past due loans 2,035 2,059
Non-accrual investment securities 98 106
Total non-performing assets (2) $ 2,133 $ 2,165
TDRs on accrual status (3) $ 2,463 $ 2,472 Non-accrual and 90 days or more past due loans as a percentage of loans receivable
0.17 % 0.18 %
Non-accrual and 90 days or more past due loans as a percentage of total assets
0.11 % 0.11 %
Non-performing assets as a percentage of total assets 0.12 % 0.12 %
Loans receivable (4) $ 1,186,788 $ 1,146,129
Total assets $ 1,835,544 $ 1,860,508 ___________________________________
(1) As ofDecember 31, 2022 andSeptember 30, 2022 , there were no one- to four-family properties in the process of foreclosure. (2) Does not include TDRs on accrual status. (3) Does not include TDRs totaling$116 and$142 reported as non-accrual loans atDecember 31, 2022 andSeptember 30, 2022 , respectively. (4) Does not include loans held for sale, and loan balances are before the allowance for loan losses. 40
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Comparison of Operating Results for the Three Months Ended
Net income increased by$2.02 million , or 36.9%, to$7.51 million for the quarter endedDecember 31, 2022 from$5.49 million for the quarter endedDecember 31, 2021 . Net income per diluted common share increased by$0.25 , or 38.5%, to$0.90 for the quarter endedDecember 31, 2022 from$0.65 for the quarter endedDecember 31, 2021 . The increases in net income and net income per diluted common share for the three months endedDecember 31, 2022 were primarily due to a$5.05 million increase in net interest income. This increase was partially offset by a$1.27 million increase in non-interest expense, a$737,000 decrease in non-interest income, a$525,000 increase in the provision for loans losses and a$492,000 increase in the provision for income taxes .
A more detailed explanation of the income statement categories is presented below.
Net Interest Income: Net interest income increased by$5.05 million , or 39.8%, to$17.74 million for the quarter endedDecember 31, 2022 from$12.70 million for the quarter endedDecember 31, 2021 . The increase in net interest income was primarily due to an increase in the average yield on interest-bearing deposits in banks and CDs, an increase in the average yield and balance of investment securities and an increase in average balance of loans, as the Company placed a portion of its excess overnight liquidity into higher-earning loans and investments during the period. This increase was partially offset by an increase in the average cost of interest-bearing liabilities and a decrease in deferred SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods. Total interest and dividend income increased by$5.77 million , or 43.2%, to$19.11 million for the quarter endedDecember 31, 2022 from$13.34 million for the quarter endedDecember 31, 2021 , primarily due to increases in the average yield and balance of investment securities, the average balance of loans receivable and the average yield on interest-bearing deposits in banks and CDs. These increase were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs. Average total interest-earning assets increased by$20.43 million , or 1.2%, to$1.76 billion for the quarter endedDecember 31, 2022 from$1.74 billion for the quarter endedDecember 31, 2021 . Average investment securities increased by$167.35 million , or 107.3%, average loans receivable increased by$167.01 million , or 16.7% and was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of$313.90 million , or 54.1%, between the periods. During the quarter endedDecember 31, 2022 , the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by$28,000 compared to$57,000 for the quarter endedDecember 31, 2021 . The incremental accretion will change during any period based on the volume of prepayments but is expected to decrease over time as the balance of the net discount declines. During the quarter endedDecember 31, 2022 , there was a total of$120,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to$145,000 collected for the quarter endedDecember 31, 2021 . The average yield on interest-earning assets increased to 4.34% for the quarter endedDecember 31, 2022 from 3.07% for the quarter endedDecember 31, 2021 . The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 339 basis points and 170 basis points to 3.59% and 2.74%, respectively, for the quarter endedDecember 31, 2022 compared to the quarter endedDecember 31, 2021 , while the average yield on loans receivable decreased nine basis points to 4.97% during the same period. Also impacting the average yield on loans receivable and average interest-earning asset balances during the quarters endedDecember 31, 2022 and 2021 were SBA PPP loans. These PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each loan. Total interest expense increased by$723,000 , or 111.9%, to$1.37 million for the quarter endedDecember 31, 2022 from$646,000 for the quarter endedDecember 31, 2021 . The increase in interest expense was due to an increase in the cost of interest-bearing liabilities and to a much lesser extent an increase in the average balance. The average cost of interest-bearing liabilities increased to 0.50% for the quarter endedDecember 31, 2022 from 0.24% for the quarter endedDecember 31, 2021 . Average interest-bearing liabilities increased by$28.54 million , or 2.7%, to$1.09 billion for the quarter endedDecember 31, 2022 from$1.07 billion for the quarter endedDecember 31, 2021 , primarily due to increases in the average balances of money market accounts, savings accounts, and certificate of deposit accounts that was partially offset by a decline in the average balance of NOW checking accounts.
As a result of these changes, the net interest margin ("NIM") increased to 4.03%
for the quarter ended
41
--------------------------------------------------------------------------------Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities and average yields and costs. Such yields
and costs for the periods indicated are derived by dividing income or expense by
the average daily balance of assets or liabilities, respectively, for the
periods presented (dollars in thousands).
Three Months Ended December 31,
2022 2021
Average Interest and Yield/ Average Interest and Yield/
Balance Dividends Cost Balance Dividends Cost
Interest-earning assets:
Loans receivable (1)(2) $ 1,164,369 $ 14,457 4.97 % $ 997,358 $ 12,622 5.06 %
Investment securities (2) 323,368 2,214 2.74 156,023 405 1.04
Dividends from mutual funds, FHLB stock and
other investments 6,028 51 3.38 6,054 27 1.78
Interest-bearing deposits in banks and CDs 266,439 2,390 3.59 580,337 288 0.20
Total interest-earning assets 1,760,204 19,112 4.34 1,739,772 13,342 3.07
Non-interest-earning assets 84,806 83,563
Total assets $ 1,845,010 $ 1,823,335
Interest-bearing liabilities:
Savings $ 279,832 82 0.12 $ 264,651 55 0.08
Money market 239,424 321 0.53 222,945 163 0.29
NOW checking 439,750 498 0.45 440,744 139 0.13
Certificates of deposit 135,467 468 1.37 132,590 274 0.82
Long-term borrowings - - - 5,000 15 1.19
Total interest-bearing liabilities 1,094,473 1,369 0.50 1,065,930 646 0.24
Non-interest-bearing deposits 519,307 538,865
Other liabilities 11,002 10,566
Total liabilities 1,624,782 1,615,361
Shareholders' equity 220,228 207,974
Total liabilities and
shareholders' equity $ 1,845,010 $ 1,823,335
Net interest income $ 17,743 $ 12,696
Interest rate spread 3.84 % 2.83 %
Net interest margin (3) 4.03 % 2.92 %
Ratio of average interest-earning assets to
average interest- bearing liabilities 160.83 % 163.22 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held
for sale. Amortized net deferred loan fees, late fees, extension fees,
prepayment penalties, and the accretion of the fair value discount on loans
acquired in the South Sound Acquisition are included with interest and
dividends.
(2)Average balances include loans and investment securities on non-accrual
status.
(3)Net interest income divided by total average interest-earning assets,
annualized.
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Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on the
net interest income of the Company. Information is provided with respect to the
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume), and (iii) the
net change (sum of the prior columns). Changes in rate/volume have been
allocated to rate and volume variances based on the absolute values of each
(dollars in thousands).
Three months ended
December 31, 2022
compared to three months
ended December 31, 2021
increase (decrease) due to
Net
Rate Volume Change
Interest-earning assets:
Loans receivable and loans held for sale $ (243) $ 2,078 $ 1,835
Investment securities 1,093 716 1,809
Dividends from mutual funds, FHLB stock and other investments 24 - 24
Interest-bearing deposits in banks and CDs 2,340 (238) 2,102
Total net increase in income on interest-earning assets 3,214 2,556 5,770
Interest-bearing liabilities:
Savings 24 3 27
Money market 145 13 158
NOW checking 359 - 359
Certificates of deposit 188 6 194
Long-term borrowings (7) (8) (15)
Total net increase in expense on interest-bearing liabilities 709 14 723
Net increase in net interest income $ 2,505 $ 2,542 $ 5,047
Provision for Loan Losses: There was a $525,000 provision for loan losses for
the quarter ended December 31, 2022 , primarily due to the increase in loans
receivable during the period. There was no provision for loan losses for the
quarter ended December 31, 2021 . For the quarter ended December 31, 2022 , there
were net recoveries of $1,000 compared to net charge-offs of $1,000 for the
quarter ended December 31, 2021 . Non-accrual loans decreased by $24,000 , or
1.2%, to $2.04 million at December 31, 2022 from $2.06 million at September 30,
2022 and decreased by $818,000 , or 28.7%, from $2.85 million at December 31,
2021 . Total delinquent loans (past due 30 days or more) and non-accrual loans
increased by $157,000 , or 7.5%, to $2.25 million at December 31, 2022 , from
$2.10 million at September 30, 2022 and decreased by $983,000 , or 30.4%, from
$3.24 million one year ago.
The $631,000 balance of SBA PPP loans was omitted from the Company's normal
allowance for loan losses calculation at December 31, 2022 , as these loans are
fully guaranteed by the SBA, and management expects that most PPP borrowers will
seek full or partial forgiveness of their loan obligations from the SBA within a
short time frame, which will in turn reimburse the Bank for the amount forgiven.
The Company has established a comprehensive methodology for determining the
allowance for loan losses. On a quarterly basis, the Company performs an
analysis that considers pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the amount and composition of the
loan portfolio, historic loss experience for various loan segments, changes in
economic conditions, delinquency rates, a detailed analysis of impaired loans,
and other factors to determine an appropriate level of allowance for loan
losses. Impaired loans are subjected to an impairment analysis to determine an
appropriate reserve amount to be allocated to each loan. The aggregate principal
impairment reserve amount determined at September 30, 2022 and December 31, 2022
was $127,000 and was $254,000 at December 31, 2021 .
43
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In accordance with GAAP, loans acquired in the South Sound Acquisition were
recorded at their estimated fair value, which resulted in a net discount to the
loan's contractual amounts, of which a portion reflects a discount for possible
credit losses. Credit discounts are included in the determination of fair value,
and, as a result, no allowance for loan losses is recorded for acquired loans at
the acquisition date. The discount recorded on the acquired loans is not
reflected in the allowance for loan losses or related allowance coverage ratios.
The remaining fair value discount on loans acquired in the South Sound
Acquisition was $239,000 at December 31, 2022 . The Company believes that this
should be considered by investors when comparing the Company's allowance for
loan losses to total loans in periods prior to the South Sound Acquisition.
Based on its comprehensive analysis, management believes that the allowance for
loan losses of $14.23 million at December 31, 2022 (1.20% of loans receivable
and 699.2% of non-performing loans) was adequate to provide for probable losses
inherent in the loan portfolio based on an evaluation of known and inherent
risks in the loan portfolio at that date. The allowance for loan losses was
$13.70 million (1.20% of loans receivable and 665.5% of non-performing loans) at
September 30, 2022 and $13.47 million (1.34% of loans receivable and 472.1% of
non-performing loans) at December 31, 2021 . While the Company believes that it
has established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that bank regulators, in reviewing the Company's loan
portfolio, will not request the Company to significantly increase its allowance
for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate. A further
decline in national and local economic conditions, as a result of the effects of
inflation, a potential recession or slowing economic growth, among other
factors, could result in a material increase in the allowance for loan losses
and may adversely affect the Company's financial condition and results of
operations. For additional information, see Note 4 of the Notes to Unaudited
Consolidated Financial Statements contained in "Item 1, Financial Statements."
Non-interest Income: Total non-interest income decreased by $737,000 , or 21.4%,
to $2.71 million for the quarter ended December 31, 2022 from $3.44 million for
the quarter ended December 31, 2021 . This decrease was primarily due to a
$642,000 decrease in net gain on sales of loans, a $119,000 decrease in the net
valuation recovery on loan servicing rights and smaller decreases in several
other categories. These decreases to non-interest income were partially offset
by a $34,000 increase in service charges on deposits and smaller increases in
several other categories. The decrease in net gain on sales of loans was
primarily due to a decrease in the dollar amount of fixed-rate one- to
four-family loans originated and sold during the current quarter reflecting
reduced refinance activity compared to the same period last year. Gain on sale
of loans was also impacted by rising interest rates, declining homes sales and a
decision to retain a higher percentage of single family loans originated during
the quarter in the portfolio rather than selling them.
Non-interest Expense: Total non-interest expense increased by $1.27 million , or
13.7%, to $10.54 million for the quarter ended December 31, 2022 from $9.26
million for the quarter ended December 31, 2021 . This increase was primarily due
to a $729,000 increase in salaries and employee benefits, a $176,000 increase in
data processing and telecommunication expense, a $158,000 increase in
professional fees and smaller increases in several other categories, which were
partially offset by smaller decreases in several categories. The increase in
salaries and other employee benefits was primarily due to annual salary
adjustments (effective October 1, 2022 ) and the hiring of additional lending
personnel. The increase in professional fees was primarily due to higher legal
and consulting fees. The increase in data processing and telecommunication
expense was primarily due to the addition of several technology products and
increased processing volumes. The efficiency ratio for the current quarter
improved to 51.52% from 57.40% for the comparable quarter one year ago.
Provision for Income Taxes: The provision for income taxes increased by
$492,000 , or 35.4%, to $1.88 million for the quarter ended December 31, 2022
from $1.39 million for the quarter ended December 31, 2021 . The increase in the
provision for income taxes was primarily due to higher income before income
taxes. The Company's effective income tax rate was 20.0% for the quarter ended
December 31, 2022 and 20.2% for the quarter ended December 31, 2021 .
Liquidity
The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed). While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At
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December 31, 2022 , the Bank's regulatory liquidity ratio (net cash, and
short-term and marketable assets, as a percentage of net deposits and short-term
liabilities) was 26.22%. At December 31, 2022 , the Bank maintained an
uncommitted credit facility with the FHLB that provided for immediately
available borrowings up to an aggregate amount equal to 45% of total assets,
limited by available collateral, under which no amounts were outstanding. The
Bank had $513.48 million available for borrowings with the FHLB at December 31,
2022 . The Bank maintains a short-term borrowing line with the FRB with total
credit based on eligible collateral. At December 31, 2022 , the Bank had no
outstanding balance on this borrowing line, under which $84.89 million was
available for future borrowings. The Bank also maintains a $50.00 million
overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At
December 31, 2022 , the Bank did not have an outstanding balance on this
borrowing line. Subject to market conditions, the Bank expects to utilize these
borrowing facilities from time to time in the future to fund loan originations
and deposits withdrawals, to satisfy other financial commitments, repay maturing
debt and to take advantage of investment opportunities to the extent feasible.
Liquidity management is both a short and long-term responsibility of the Bank's
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected loan sales,
(iii) expected deposit flows, and (iv) yields available on interest-bearing
deposits. Excess liquidity is invested generally in interest-bearing overnight
deposits, CDs held for investment and short-term government and agency
obligations. If the Bank requires funds beyond its ability to generate them
internally, it has additional borrowing capacity with the FHLB, the FRB and
PCBB.
The Bank's primary investing activity is the origination of loans and, to a
lesser extent, the purchase of investment securities. During the three months
ended December 31, 2022 and 2021, the Bank originated $101.67 million and
$176.60 million of loans, respectively. At December 31, 2022 , the Bank had loan
commitments totaling $148.06 million and undisbursed construction loans in
process totaling $112.10 million . Investment securities purchased during the
three months ended December 31, 2022 and 2021 totaled $31.31 million and
$48.49 million , respectively.
The Bank's liquidity is also affected by the volume of loans sold and loan
principal payments. During the three months ended December 31, 2022 and 2021,
the Bank sold $1.16 million and $22.56 million , respectively, in loans and loan
participation interests. During the three months ended December 31, 2022 and
2021, the Bank received $50.71 million and $113.41 million in principal
repayments, respectively.
The Bank's liquid assets in the form of cash and cash equivalents, CDs held for
investment and investment securities decreased to $583.55 million at
December 31, 2022 from $648.51 million at September 30, 2022 . CDs that are
scheduled to mature in less than one year from December 31, 2022 totaled
$108.05 million . Historically, the Bank has been able to retain a significant
amount of its deposits as they mature.
Capital expenditures are incurred on an ongoing basis to expand and improve the
Bank's product offerings, enhance and modernize technology infrastructure, and
to introduce new technology-based products to compete effectively in the various
markets. Capital expenditure projects are evaluated based on a variety of
factors, including expected strategic impacts (such as forecasted impact on
revenue growth, productivity, expenses, service levels and customer retention)
and the expected return on investment. The amount of capital investment is
influenced by, among other things, current and projected demand for services and
products, cash flow generated by operating activities, cash required for other
purposes and regulatory considerations.
Based on current objectives, there are no projects scheduled for capital
investments in premises and equipment during the remaining nine months ending
September 30, 2023 that would materially impact liquidity. The Company currently
expects to continue the current practice of paying quarterly cash dividends on
common stock subject to the Board of Directors' discretion to modify or
terminate this practice at any time and for any reason without prior notice. The
current quarterly common stock dividend rate is $0.23 per share, as approved by
the Board of Directors, which is a dividend rate per share that enables the
Company to balance multiple objectives of managing and investing in the Bank and
returning a substantial portion of cash to shareholders. Assuming continued
payment during fiscal year 2023 at the rate of $0.23 per share, the average
total dividend paid each quarter would be approximately $1.90 million based on
the number of current outstanding shares (which assumes no increases or
decreases in the number of shares).
For the remaining nine months ending September 30, 2023 , the Bank projects that
fixed commitments will include $233,000 of operating lease payments. There are
no scheduled payments and maturities of FHLB borrowings during the fiscal year
2023. In addition, at December 31, 2022 , there were other future obligations and
accrued expenses of $8.90 million .
The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.
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Timberland Bancorp is a separate legal entity from the Bank and must provide for
its own liquidity and pay its own operating expenses. Sources of capital and
liquidity for Timberland Bancorp include distributions from the Bank and the
issuance of debt or equity securities. At December 31, 2022 , Timberland Bancorp
(on an unconsolidated basis) had liquid assets of $2.56 million .
Capital Resources
The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by theFDIC . Under theFDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Based on its capital levels atDecember 31, 2022 , the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of theFDIC . Based on capital levels atDecember 31, 2022 , the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status. The following table compares the Bank's actual capital amounts atDecember 31, 2022 to its minimum regulatory capital requirements at that date (dollars in thousands): Regulatory To Be "Well Capitalized" Minimum To Under Prompt Be "Adequately
Corrective Action
Actual Capitalized" Provisions
Amount Ratio Amount Ratio Amount Ratio
Leverage Capital Ratio:
Tier 1 capital $206,651 11.32 % $73,054 4.00 % $91,317 5.00 %
Risk-based Capital Ratios:
Common equity Tier 1 capital 206,651 17.81 52,208 4.50 75,412 6.50
Tier 1 capital 206,651 17.81 69,612 6.00 92,815 8.00
Total capital 221,154 19.06 92,815 8.00 116,019 10.00
In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total
capital ratios, the Bank is required to maintain a capital conservation buffer
consisting of additional CET1 capital greater than 2.5% of risk-weighted assets
above the required minimum levels in order to avoid limitations on paying
dividends, engaging in share repurchases, and paying discretionary bonuses based
on percentages of retained income that could be utilized for such actions. At
December 31, 2022 , the Bank's CET1 capital exceeded the required capital
conservation buffer.
Timberland Bancorp, Inc. is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to capital adequacy requirements of
the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and
the regulations of the Federal Reserve . For a bank holding company with less
than $3.0 billion in assets (as of June 30th of the preceding year), the capital
guidelines apply on a bank only basis, and the Federal Reserve expects the
holding company's subsidiary bank to be well capitalized under the prompt
corrective action regulations. If Timberland Bancorp, Inc. were subject to
regulatory guidelines for bank holding companies with $3.0 billion or more in
assets, at December 31, 2022 , Timberland Bancorp, Inc. would have exceeded all
regulatory requirements. The following table presents for informational purposes
the regulatory capital ratios for Timberland Bancorp, Inc. as of December 31,
2022 (dollars in thousands):
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Actual
Amount Ratio
Leverage Capital Ratio:
Tier 1 capital $209,776 11.46 %
Risk-based Capital Ratios:
Common equity Tier 1 capital 209,776 18.07
Tier 1 capital 209,776 18.07
Total capital 224,285 19.32
Key Financial Ratios and Data
Three Months Ended December 31,
2022 2021
PERFORMANCE RATIOS:
Return on average assets 1.63 % 1.20 %
Return on average equity 13.63 % 10.55 %
Net interest margin 4.03 % 2.92 %
Efficiency ratio 51.52 % 57.40 %© Edgar Online, source
