Timberland Bancorp, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; comparisons are primarily with FY2021. The company is a Washington community bank holding company operating Timberland Bank, with 23 branches across six western Washington counties.
Financial performance and condition
| Metric | FY2022 / September 30, 2022 | Prior comparable period |
|---|---|---|
| Net interest income | $55.8 million | $51.9 million; up 7.7% |
| Net interest margin | 3.16% | 3.25% |
| Non-interest income | $12.6 million | $17.2 million; down 26.4% |
| Non-interest expense | $38.6 million | $34.6 million; up 11.7% |
| Net income | $23.6 million | $27.6 million; down 14.4% |
| Diluted earnings per share | $2.82 | $3.27 |
| Return on average assets / equity | 1.27% / 11.14% | 1.64% / 13.98% |
| Total assets | $1.86 billion | $1.79 billion; up 3.8% |
| Net loans | $1.13 billion | $968.5 million; up 16.9% |
| Deposits | $1.63 billion | $1.57 billion; up 3.9% |
| Shareholders’ equity | $218.6 million | $206.9 million |
Cash flow: Operating activities provided $26.5 million; investing activities used $335.2 million, principally reflecting securities purchases and loan growth; financing activities provided $45.2 million. Cash and cash equivalents fell $263.4 million to $316.8 million. The filing reports no FHLB borrowings at year-end; available capacity was approximately $492.3 million at the FHLB, $77.1 million at the Federal Reserve and $50 million through PCBB.
Liquidity and capital: The bank’s regulatory liquidity ratio was 32.1%. Management said liquid assets and available credit lines were adequate for obligations over at least the next 12 months. The bank was well capitalized, with a 10.9% Tier 1 leverage ratio, 18.0% CET1 and Tier 1 risk-based ratios, and a 19.3% total risk-based capital ratio. The company’s total equity-to-assets ratio was 11.75%.
Asset quality and portfolio: Non-accrual loans were $2.06 million, or 0.18% of loans; non-performing assets were $2.17 million, or 0.12% of assets. The allowance for loan losses was $13.70 million, equal to 1.20% of loans and 665.52% of non-performing loans. Commercial real estate represented 42.8% of total loans; construction loans were $255.6 million, or 20.4%. Potential problem loans outside non-performing assets totaled $5.56 million.
Material changes and drivers
- Net interest income rose on growth in average loans and securities and lower funding costs, but margin narrowed nine basis points to 3.16%. Average yield on earning assets declined to 3.31% from 3.45%; average cost of interest-bearing liabilities declined to 0.24% from 0.32%.
- Net income fell mainly because gain on loan sales declined $4.39 million as higher mortgage rates reduced refinancing and loan-sale activity, while non-interest expense increased $4.04 million. Salaries and benefits rose $2.07 million; professional fees rose $741,000.
- Loans grew $164.0 million, led by commercial real estate, one- to four-family mortgages and commercial business loans. PPP balances fell by $39.9 million as loans were forgiven or repaid.
- Deposits grew $61.6 million, led by money market, savings and NOW accounts; non-interest-bearing demand deposits declined $5.2 million. Deposit growth was slower than in FY2021.
- Investment securities increased approximately $175.6 million as excess liquidity was moved into securities. Unrealized losses reflected rising rates: held-to-maturity securities had $17.1 million in gross unrealized losses and available-for-sale securities $894,000. Available-for-sale marks contributed to a $717,000 year-end accumulated other comprehensive loss, net of tax.
- The company recorded a $270,000 loan-loss provision, versus none in FY2021. Net charge-offs were $36,000, compared with net recoveries of $55,000 in FY2021. Non-accrual loans declined, but substandard loans increased $3.78 million to $7.39 million.
Outlook, commentary and risks
- Management said the balance sheet was positioned to benefit as variable-rate assets reprice and expected higher net interest margin if the Federal Reserve continued raising rates. This is an expectation, not a formal earnings forecast. The filing’s September 2022 rate-shock model estimated net interest income up 3.19% for an immediate 100-basis-point increase and down 6.28% for a 100-basis-point decrease; management cautioned that model results are assumption-dependent.
- The company expected to continue quarterly dividends at $0.22 per share, subject to board discretion and regulatory limits. FY2022 dividends were $0.87 per share, down from $1.03 in FY2021. It repurchased 170,237 shares for $4.58 million during FY2022.
- Management anticipated a higher allowance for credit losses under CECL, effective for the company’s fiscal year beginning October 1, 2023; the amount of any increase was not yet known.
- Key exposures include concentration in Washington real estate lending, especially commercial real estate and construction; higher rates could raise deposit costs, reduce borrower capacity and pressure collateral values. CRE loans, as defined in the filing, were 275.18% of regulatory capital; construction, land-development and land loans were 82.89% of regulatory capital.
- Other identified risks include inflation or recession, interest-rate and securities-value changes, deposit competition and retention, cyber and third-party service disruptions, regulatory changes, and the transition of $2.92 million in LIBOR-linked loans to SOFR in June 2023. The CEO was expected to retire in January 2023.
- At year-end, no customers remained on COVID-related payment deferrals. Management reported no pending legal proceeding believed likely to have a material adverse effect. The auditor issued an unqualified opinion; the allowance for loan losses was identified as a critical audit matter because of the judgment involved in qualitative reserve estimates.
Important facts for investors to verify
- Whether loan growth and higher asset yields offset deposit repricing and maintain net interest margin as rates change.
- Commercial real estate and construction portfolio performance, including the increase in substandard loans and the adequacy of reserves under changing local economic and property conditions.
- Deposit mix, uninsured deposits (estimated at $122.7 million), deposit pricing and the sustainability of core-deposit growth.
- Realized liquidity and capital effects of securities’ unrealized losses, particularly if securities must be sold or funding conditions tighten.
- The actual CECL adoption impact, progress on the LIBOR-to-SOFR transition, and dividend capacity after regulatory and operating needs.