Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2023; filed August 7, 2023. Timberland Bancorp is a Washington community bank holding company operating Timberland Bank, with 23 offices in western Washington. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow amounts are generally in millions unless noted.
Financial performance and condition
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Interest and dividend income | $19.89 million, up 36.0% year over year | $58.39 million, up 40.7% |
| Net interest income | $16.63 million, up 19.0% | $51.53 million, up 30.2% |
| Net interest margin | 3.94%, versus 3.11% | 3.99%, versus 2.99% |
| Net income | $6.31 million, versus $5.74 million | $20.48 million, versus $16.55 million |
| Diluted earnings per share | $0.77, versus $0.69 | $2.47, versus $1.97 |
| Provision for loan losses | $610,000, versus none | $1.61 million, versus none |
At June 30, total assets were $1.81 billion, down 2.8% from September 30, 2022. Net loans were $1.26 billion, up 11.3%; deposits were $1.55 billion, down 4.9%; and shareholders’ equity was $229.3 million, up 4.9%. Total liabilities were $1.58 billion. FHLB borrowings were $15 million, compared with none at September 30, 2022.
For the nine months, operating cash flow was $23.23 million, compared with $18.39 million in the prior-year period. Investing activities used $135.60 million, primarily reflecting $130.40 million of net loan growth; financing activities used $74.44 million, including deposit outflows, dividends and share repurchases. Cash and cash equivalents declined to $129.95 million from $316.76 million at September 30, 2022.
The allowance for loan losses was $15.31 million, or 1.20% of loans. Non-performing assets were $1.67 million, or 0.09% of assets, versus $2.17 million and 0.12% at September 30, 2022. The Bank reported regulatory capital ratios above minimums and was classified as well capitalized; its leverage ratio was 12.14% and total risk-based capital ratio was 19.29%.
Material changes and management commentary
- Earnings growth was driven mainly by higher yields on loans and investments and increased average loan and investment balances. Higher funding costs partly offset the benefit: quarterly interest expense rose to $3.26 million from $645,000, and the average cost of interest-bearing liabilities increased to 1.22% from 0.23%.
- Deposit balances fell amid competitive pricing and customers moving funds to higher-yielding alternatives. Non-interest-bearing deposits declined by $77.33 million from September 2022; certificates of deposit increased by $128.73 million, including $38.32 million in brokered deposits.
- Management said cash was deployed into loans and securities and used to fund deposit withdrawals. At June 30, the Bank reported a 15.59% regulatory liquidity ratio and $549.08 million of available FHLB borrowing capacity, plus $85 million available on its FRB BIC line, $57 million on its BTFP line and a $50 million PCBB line. Management believed liquidity was adequate for at least 12 months.
- Commercial real estate was the largest loan category, at $557.0 million, or 40.2% of gross loans. Total mortgage loans were 87.0% of gross loans. Loan originations declined 37.5% year over year for the nine-month period, while net loans grew 11.3% from fiscal year-end.
- Non-interest expense rose 10.7% for the quarter and 13.8% for the nine-month period, including higher compensation and technology costs. The quarterly efficiency ratio improved to 56.01% from 57.80%.
Outlook, risks and unusual items
- The filing gives no specific earnings, revenue or margin guidance. Management noted the Federal Reserve raised its target range by 25 basis points after quarter-end, to 5.25%–5.50%; continued rate changes could affect asset yields, deposit costs and liquidity.
- Held-to-maturity securities had estimated fair value of $260.47 million versus $275.05 million amortized cost, including $14.85 million of gross unrealized losses. Management attributed losses primarily to interest rates and market spreads, considered them temporary, and said it had the ability and intent to hold securities until recovery. Available-for-sale securities had $930,000 of gross unrealized losses.
- Management identified risks including deposit competition and retention, interest-rate changes, economic slowdown or recession, commercial real estate and other credit deterioration, and potential increases in loan-loss provisions. The $15.31 million allowance was based on estimates; management cautioned actual losses or regulatory expectations could require increases.
- The Company expected to adopt the current expected credit losses standard (CECL) in fiscal 2024 and did not expect a material allowance change, though its estimate was not final. Goodwill of $15.13 million was assessed as not impaired in the quarter; future impairment remains possible if conditions deteriorate.
- On July 25, 2023, after quarter-end, the Company terminated its prior repurchase plan and authorized a new program for up to 404,708 shares, or 5% of outstanding shares. The quarterly dividend was $0.23 per share, subject to Board discretion.
- Management reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls as of June 30, 2023.
Important facts for investors to verify
- Whether deposit outflows continue and how the mix shifts toward higher-cost CDs and brokered deposits, and the effect on net interest margin.
- Available liquidity and collateral capacity under borrowing facilities, given the sharp decline in cash and securities pledged as collateral of $204.13 million.
- Credit trends in commercial real estate and construction lending, including non-accrual loans, delinquencies, and the adequacy of the allowance as CECL is adopted.
- Interest-rate and market-value exposure in the securities portfolio, particularly the held-to-maturity unrealized loss position and the ability to avoid selling securities before recovery.
- The execution and capital impact of the new share-repurchase authorization, dividend policy, and ongoing loan growth.
- The filing reports 8,094,174 shares outstanding at June 30, while its cover reports 8,095,174 shares as of August 1; verify the share count and relevant subsequent changes.