Timberland Bancorp, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. The company is a community bank operating in western Washington through Timberland Bank.
Financial results and position
| Metric | Quarter ended June 30, 2022 | Nine months ended June 30, 2022 |
|---|---|---|
| Net interest income | $13.98 million; up 6.3% year over year | $39.57 million; up 2.1% |
| Non-interest income | $3.10 million; down 27.3% | $9.63 million; down 29.8% |
| Non-interest expense | $9.87 million; up 14.6% | $28.47 million; up 11.3% |
| Net income | $5.74 million, versus $7.02 million | $16.55 million, versus $21.57 million |
| Diluted earnings per share | $0.69, versus $0.83 | $1.97, versus $2.55 |
| Net interest margin | 3.11%, versus 3.22% | 2.99%, versus 3.30% |
At June 30, total assets were $1.89 billion, up 5.3% from September 30, 2021; net loans were $1.09 billion, up 12.3%; deposits were $1.66 billion, up 6.0%; and shareholders’ equity was $214.32 million, up 3.6%. Cash and cash equivalents were $422.15 million, down from $580.20 million. The company had no FHLB borrowings at quarter-end, compared with $5.00 million at September 30, 2021; that borrowing was repaid in January 2022.
For the nine months, operating cash flow was $18.39 million, investing cash outflow was $256.29 million, and financing cash inflow was $79.85 million. Cash and cash equivalents decreased by $158.05 million. The investment outflow primarily reflected purchases of held-to-maturity securities and loan growth, funded in part by deposits and existing liquidity.
Quarterly return on average assets was 1.22%, return on average equity was 10.80%, and the efficiency ratio was 57.80%. The allowance for loan losses was $13.43 million, or 1.22% of loans receivable; no loan-loss provision was recorded in the quarter or nine-month period.
Changes and operating drivers
- Net income declined year over year in both periods. Lower gains on loan sales and higher operating expenses outweighed improved net interest income.
- Loan-sale gains fell to $258,000 for the quarter from $1.61 million, and to $1.34 million for nine months from $5.37 million. Management attributed the decline to reduced mortgage refinancing, fewer fixed-rate mortgage originations and lower pricing margins.
- Quarterly expenses rose primarily from salaries and employee benefits, including annual salary adjustments and additional lending staff, and higher professional fees. Nine-month other expenses also included customer refunds for deposit fees found to have been charged in error after a 2019 core-system conversion.
- Loan growth was led by commercial real estate, commercial business, residential and construction lending. The company continued to sell longer-term fixed-rate residential loans for asset-liability management and fee income.
- Unrealized losses on investment securities increased amid higher market interest rates and mortgage-related spread changes. At June 30, held-to-maturity securities had $12.17 million of gross unrealized losses, and available-for-sale securities had $702,000. Management considered the declines temporary and stated it had the intent and ability to hold the securities until recovery.
- Non-performing assets were $2.41 million, or 0.13% of assets, down from $3.17 million and 0.18% at September 30, 2021. Non-accrual loans were $2.29 million; no loans were 90 days past due and still accruing.
Liquidity, outlook and risks
The Bank reported a 37.28% regulatory liquidity ratio and stated that it believed liquid assets and borrowing facilities were adequate for obligations for at least the next 12 months. Available borrowing capacity was $474.66 million at the FHLB, $87.72 million at the Federal Reserve and $50.00 million through Pacific Coast Bankers’ Bank; no amounts were outstanding on these lines. Loan commitments totaled $178.55 million, in addition to $102.04 million of undisbursed construction loans in process.
The Bank exceeded regulatory capital requirements and was classified as well-capitalized. Its actual leverage ratio was 10.61%, and its total risk-based capital ratio was 19.56%. Management expected to continue quarterly cash dividends at $0.22 per share, subject to Board discretion. The filing provides no earnings or revenue guidance.
Management cited risks from economic weakness, inflation, a potential recession, interest-rate and funding-cost changes, loan and real-estate credit deterioration, deposit competition, cybersecurity and third-party technology disruptions, regulatory actions, and litigation. Management anticipated that adoption of the expected-credit-loss standard (CECL) would increase the loan-loss allowance, but said the amount was not yet known. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2022.
Important facts for investors to verify
- Whether net interest margin and deposit costs hold up as interest rates and funding competition change.
- Whether loan growth, portfolio mix and credit quality support the current allowance; the filing notes that realized losses could exceed estimates.
- Whether mortgage-sale revenue remains lower as refinancing activity declines, and whether expense growth moderates.
- The potential CECL impact on reserves and capital when implementation is completed.
- How the unrealized securities losses, customer fee refunds, and the company’s liquidity and capital position evolve in subsequent filings.
Amounts are reported in U.S. dollars; financial statement amounts are generally in thousands unless otherwise stated.