Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022; comparisons are to the three months ended December 31, 2021 unless otherwise stated. The company operates Timberland Bank, a community bank serving western Washington, with a lending focus on real estate. Financial amounts below are in millions unless noted.
Financial performance and condition
- Net income: $7.51 million, up 36.9%; diluted EPS was $0.90, versus $5.49 million and $0.65 a year earlier.
- Net interest income and margin: Net interest income rose 39.8% to $17.74 million. Net interest margin increased to 4.03% from 2.92%. Average earning-asset yield rose to 4.34% from 3.07%, while the average cost of interest-bearing liabilities rose to 0.50% from 0.24%.
- Other income and expenses: Non-interest income fell 21.4% to $2.71 million, mainly because loan-sale gains declined. Non-interest expense increased 13.7% to $10.54 million, reflecting higher compensation, technology and professional fees. The efficiency ratio improved to 51.52% from 57.40%.
- Credit costs and asset quality: The company recorded a $0.53 million loan-loss provision, primarily due to loan growth, compared with none in the prior-year quarter. The allowance was $14.23 million, or 1.20% of loans. Non-performing assets were $2.13 million, 0.12% of total assets; non-accrual loans were $2.04 million.
- Balance sheet: Total assets were $1.84 billion at quarter-end, down 1.3% from September 30, 2022. Net loans increased 3.5% to $1.17 billion; deposits decreased 1.9% to $1.60 billion. Shareholders’ equity rose 2.3% to $223.55 million.
- Liquidity and funding: Cash and cash equivalents were $224.90 million, down from $316.76 million at September 30; liquid assets, including CDs and investment securities, totaled $583.55 million. The regulatory liquidity ratio was 26.22%. There were no FHLB borrowings outstanding; reported available capacity was $513.48 million at the FHLB, $84.89 million at the Federal Reserve, and $50.00 million on an overnight PCBB line.
- Cash flow: Operating activities provided $9.42 million; investing activities used $67.61 million, principally for loans and securities; financing activities used $33.67 million, including deposit outflows and dividends. Cash and cash equivalents decreased $91.86 million during the quarter.
- Debt and capital: No FHLB borrowings were outstanding at quarter-end. The Bank was classified as well capitalized; its leverage ratio was 11.32%, CET1 ratio 17.81%, and total capital ratio 19.06%.
Material changes and notable items
- Higher asset yields and growth in average loan and securities balances drove a $5.05 million increase in net interest income. Deposit and borrowing costs also increased, with interest expense more than doubling to $1.37 million.
- Cash balances were deployed into loans and securities and used to fund deposit withdrawals. Deposits fell by $31.09 million from quarter-end September, including a $35.69 million decline in non-interest-bearing demand deposits; certificates of deposit increased.
- Loan originations declined 42.4% to $101.67 million. Loan sales fell to $1.16 million from $22.56 million, reflecting lower refinancing activity and the decision to retain more single-family loans.
- Held-to-maturity securities had $15.20 million of gross unrealized losses at December 31, 2022; available-for-sale securities had $0.92 million. Management attributed the declines principally to interest rates and market spreads, and stated it had the ability and intent to hold the securities until recovery.
- Common dividends paid during the quarter were $0.32 per share. Management stated the current quarterly dividend rate was $0.23 per share, subject to Board discretion. The company repurchased 10,570 shares for $0.35 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said the Federal Reserve had raised its target rate to 4.25%–4.50% by December 31, 2022 and indicated further increases were expected during calendar 2023.
- Management believed liquid assets and available borrowing lines were sufficient to meet obligations for at least the next 12 months. It expected to continue quarterly dividends at the stated $0.23-per-share rate, subject to Board discretion.
- The company anticipated that adopting the current expected credit loss standard (CECL) would increase the loan-loss allowance, but the amount was not yet known. Adoption was scheduled for fiscal years beginning after December 15, 2022.
- Risks cited include deterioration in local or national economic conditions, inflation or recession, interest-rate and deposit competition, borrower and real-estate credit quality, securities-market values, regulatory actions, and technology or third-party service disruptions. Management warned that actual losses could exceed the allowance.
- Commitments at December 31 included $112.10 million of undisbursed construction loans, $133.93 million of undisbursed lines of credit and $14.13 million of other credit commitments. Management said ordinary-course legal claims were not expected to materially affect financial position; no material legal proceedings were reported.
Important facts for investors to verify
- Whether margin gains persist as deposit costs reprice and non-interest-bearing deposits decline.
- Deposit trends, liquidity use, and the company’s reliance on available borrowing capacity if withdrawals continue.
- Loan growth and portfolio concentration, including commercial real estate, and any change in delinquencies, non-accrual loans or allowance adequacy.
- CECL adoption impact and the sensitivity of securities values and capital to interest rates or any need to sell securities.
- The stated $0.23 quarterly dividend rate versus the $0.32 per-share amount reported as paid during the quarter, and subsequent Board actions.