Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland 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 and nine months ended June 30, 2022.
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, generally, resulting from the ongoing COVID-19 pandemic and any governmental or societal responses thereto; the 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, and 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, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions; 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; uncertainty regarding the future of LIBOR, and the transition away from 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 the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington 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 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 regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III; 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 on 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; adverse changes in the securities markets; 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 the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war (including the Russia/Ukraine conflict) or any terrorist activities; 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 the Securities and Exchange Commission, including our 2021 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 2022 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., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 offices (including its main office in Hoquiam). At June 30, 2022, the Company had total assets of $1.89 billion, net loans receivable of $1.09 billion, total deposits of $1.66 billion and total shareholders’ equity of $214.32 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-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 its Washington State peers.
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 did not record a provision for loan losses for the three and nine months ended June 30, 2022 and 2021, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during these periods.
Net income is also affected by non-interest income and non-interest expense. For the three and nine months ended June 30, 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, including changes resulting from the COVID-19 pandemic and the government action taken to address it.
COVID-19 Impact to the Company
The Company is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic. The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of June 30, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
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 2021 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 2021 Form 10-K.
Comparison of Financial Condition at June 30, 2022 and September 30, 2021
The Company’s total assets increased by $95.62 million, or 5.3%, to $1.89 billion at June 30, 2022 from $1.79 billion at September 30, 2021. The increase in total assets was primarily due to an increase in held to maturity investment securities and an increase in loans receivable, which was partially offset by decreases in total cash and cash equivalents. The increase in total assets was funded primarily by an increase in total deposits.
Net loans receivable increased by $119.51 million, or 12.3%, to $1.09 billion at June 30, 2022 from $968.45 million at September 30, 2021, primarily due to increases in commercial real estate loans, construction loans, one-to four-family and commercial business loans (other than SBA PPP loans) and smaller increases in several other loan categories. These increases to net loans receivable were partially offset by a decrease in SBA PPP loans, an increase in the undisbursed portion of construction loans in process, and smaller decreases in several other loan categories.
Total deposits increased by $93.56 million, or 6.0%, to $1.66 billion at June 30, 2022 from $1.57 billion at September 30, 2021, primarily due to increases in NOW checking account balances, money market account balances, and savings account balances. These increases were partially offset by decreases in non-interest bearing account balances and in certificates of deposit account balances.
Shareholders’ equity increased by $7.42 million, or 3.6%, to $214.32 million at June 30, 2022 from $206.90 million at September 30, 2021. The increase in shareholders' equity was primarily due to net income, 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 $162.64 million, or 26.7%, to $446.04 million at June 30, 2022 from $608.68 million at September 30, 2021. The decrease was primarily a result of deploying overnight liquidity into higher-earning loan originations and held to maturity investment securities.
Investment Securities: Investment securities (including investments in equity securities) increased by $140.98 million, or 105.8%, to $274.21 million at June 30, 2022 from $133.23 million at September 30, 2021. This increase was primarily due to the purchase of additional held to maturity U.S. Treasury and U.S. government agency securities and to a lesser extent mortgage-backed investment securities during the nine months ended June 30, 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 increased $91,000, or 4.3% to $2.19 million at June 30, 2022 from $2.10 million at September 30, 2021, due to purchases required by the FHLB due to the increase in total assets.
Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both June 30, 2022 and September 30, 2021. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.
Loans: Net loans receivable increased by $119.51 million, or 12.3%, to $1.09 billion at June 30, 2022 from $968.45 million at September 30, 2021. The increase was primarily due to a $61.52 million increase in commercial real estate loans, a $48.24 million increase in commercial business loans (other than SBA PPP loans), a $24.75 million increase in one- to four-family loans, a $14.62 million increase in construction loans, and smaller increases in other categories. These increases were partially offset by a $39.60 million decrease in SBA PPP loans, a $6.82 million increase in the undisbursed portion of construction loans in process, and smaller decreases in several other categories. The SBA PPP loan balances decreased primarily due to borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA.
Loan originations decreased by $34.12 million, or 7.3%, to $435.92 million for the nine months ended June 30, 2022 from $470.04 million for the nine months ended June 30, 2021. The decrease in loan originations was primarily due to a decrease in the amount of SBA PPP and one- to four-family loans originated. The decrease was partially offset by increases in commercial real estate loans, constructions loans and commercial business (non-PPP) loans originations. The Company continued to sell longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest
income. The Company also periodically sells the guaranteed portion of SBA loans. Sales of fixed-rate one- to four-family mortgage loans decreased by $75.14 million, or 59.5%, to $51.05 million for the nine months ended June 30, 2022 from $126.19 million for the nine months ended June 30, 2021, primarily due to decreased refinance activity for one- to four-family loans, as mortgage refinance activity diminished as market interest rates increased.
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 $213,000, or 1.0%, to $22.15 million at June 30, 2022 from $22.37 million at September 30, 2021. This decrease was primarily due to scheduled depreciation.
OREO (Other Real Estate Owned):. At June 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value. At September 30, 2021, OREO and other repossessed assets were $157,000.
BOLI (Bank Owned Life Insurance): BOLI increased by $456,000 or 2.1%, to $22.65 million at June 30, 2022 from $22.19 million at September 30, 2021. 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 both June 30, 2022 and September 30, 2021. CDI decreased by $237,000, or 18.8%, to $1.03 million at June 30, 2022 from $1.26 million at September 30, 2021 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.”
Deposits: Deposits increased by $93.56 million, or 6.0%, to $1.66 billion at June 30, 2022 from $1.57 billion at September 30, 2021. The increase was primarily due to a $46.56 million increase in money market account balances, a $44.12 million increase in NOW checking account balances, and a $18.90 million increase in savings account balances. These increases were partially offset by an $8.68 million decrease in certificates of deposit account balances and a $7.34 million decrease in non-interest bearing account balances.
Deposits consisted of the following at June 30, 2022 and September 30, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | September 30, 2021 |
| Amount | | Percent | | Amount | | Percent |
| Non-interest-bearing demand | $ | 527,876 | | | 31.7 | % | | $ | 535,212 | | | 34.1 | % |
| NOW checking | 474,217 | | | 28.5 | | | 430,097 | | | 27.4 | |
| Savings | 279,592 | | | 16.8 | | | 260,689 | | | 16.6 | |
| Money market | 251,451 | | | 15.1 | | | 199,045 | | | 12.7 | |
| Money market - reciprocal | 5,533 | | | 0.3 | | | 11,383 | | | 0.7 | |
| Certificates of deposit under $250 | 102,752 | | | 6.2 | | | 112,348 | | | 7.1 | |
| Certificates of deposit $250 and over | 22,693 | | | 1.4 | | | 21,781 | | | 1.4 | |
| | | | | | | |
| Total | $ | 1,664,114 | | | 100.0 | % | | $ | 1,570,555 | | | 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 at June 30, 2022 as compared to one $5.00 million borrowing at September 30, 2021,with a scheduled maturity in March 2025. Due to favorable repayment terms, the Company repaid this borrowing in January 2022.
Shareholders’ Equity: Total shareholders’ equity increased by $7.42 million, or 3.6%, to $214.32 million at June 30, 2022 from $206.90 million at September 30, 2021. The increase was primarily due to net income of $16.55 million for the nine months ended June 30, 2022 and $359,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $5.42 million, the repurchase of 135,791 shares of the Company's common stock for $3.65 million (an average price of $26.89 per share) and a change in the accumulated other comprehensive income (loss) category of $624,000 related to the unrealized holding loss on investment securities available for sale. For additional information, see Item 2 of Part II of this Form 10-Q.
Asset Quality: The non-performing assets to total assets ratio was 0.13% at June 30, 2022 compared to 0.18% at September 30, 2021. Total non-performing assets decreased by $765,000, or 24.1%, to $2.41 million at June 30, 2022 from $3.17 million
at September 30, 2021. The decrease in non-performing assets was due to a $563,000 decrease in non-accrual loans, a $157,000 decrease in OREO and other repossessed assets and a $45,000 decrease in non-accrual investment securities.
The following table sets forth information with respect to the Company’s non-performing assets at June 30, 2022 and September 30, 2021 (dollars in thousands):
| | | | | | | | | | | |
| June 30,
2022 | | September 30,
2021 |
| Loans accounted for on a non-accrual basis: | | | |
| Mortgage loans: | | | |
| One- to four-family (1) | $ | 393 | | | $ | 407 | |
| | | |
| Commercial | 671 | | | 773 | |
| | | |
| | | |
| Land | 651 | | | 683 | |
| Consumer loans: | | | |
| Home equity and second mortgage | 260 | | | 516 | |
| Other | 4 | | | 17 | |
| Commercial business loans | 312 | | | 458 | |
| Total loans accounted for on a non-accrual basis | 2,291 | | | 2,854 | |
| | | |
| Accruing loans which are contractually past due 90 days or more | — | | | — | |
| | | |
| Total of non-accrual and 90 days past due loans | 2,291 | | | 2,854 | |
| | | |
| Non-accrual investment securities | 114 | | | 159 | |
| | | |
| OREO and other repossessed assets, net (2) | — | | | 157 | |
| Total non-performing assets (3) | $ | 2,405 | | | $ | 3,170 | |
| | | |
| TDRs on accrual status (4) | $ | 2,484 | | | $ | 2,371 | |
| | | |
| Non-accrual and 90 days or more past due loans as a percentage of loans receivable | 0.21 | % | | 0.29 | % |
| | | |
| Non-accrual and 90 days or more past due loans as a percentage of total assets | 0.12 | % | | 0.16 | % |
| | | |
| Non-performing assets as a percentage of total assets | 0.13 | % | | 0.18 | % |
| | | |
| Loans receivable (5) | $ | 1,101,400 | | | $ | 981,923 | |
| | | |
| Total assets | $ | 1,887,795 | | | $ | 1,792,180 | |
___________________________________
(1) As of June 30, 2022, there were no one- to four-family properties in the process of foreclosure. At September 30, 2021, there were two one- to-four family properties in the process of foreclosure.
(2) As of June 30, 2022 and September 30, 2021, the balance of OREO did not include any foreclosed residential real estate property.
(3) Does not include TDRs on accrual status.
(4) Does not include TDRs totaling $158 and $182 reported as non-accrual loans at June 30, 2022 and September 30, 2021, respectively.
(5) Does not include loans held for sale, and loan balances are before the allowance for loan losses.
Comparison of Operating Results for the Three and Nine Months Ended June 30, 2022 and 2021
Net income decreased by $1.29 million, or 18.3%, to $5.74 million for the quarter ended June 30, 2022 from $7.02 million for the quarter ended June 30, 2021. Net income per diluted common share decreased by $0.14, or 16.9%, to $0.69 for the quarter ended June 30, 2022 from $0.83 for the quarter ended June 30, 2021. The decreases in net income and net income per diluted common share for the three months ended June 30, 2022 were primarily due to a $1.16 million decrease in non-interest income and a $1.26 million increase in non-interest expense. These decreases were partially offset by an $825,000 increase in net interest income and a $314,000 decrease in the provision for income taxes .
Net income decreased by $5.02 million, or 23.3%, to $16.55 million for the nine months ended June 30, 2022 from $21.57 million for the nine months ended June 30, 2021. Net income per diluted common share decreased by $0.58, or 22.75%, to $1.97 for the nine months ended June 30, 2022 from $2.55 for the nine months ended June 30, 2021. The decrease in net income and net income per diluted common share for the nine months ended June 30, 2022 were primarily due to a $4.08 million decrease in non-interest income and a $2.90 million increase in non-interest expense. These decreases were partially offset by an $823,000 increase in net interest income and a $1.14 million decrease 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 $825,000, or 6.3%, to $13.98 million for the quarter ended June 30, 2022 from $13.16 million for the quarter ended June 30, 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 balance of investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning investments during the period, and a decline in average cost of interest-bearing liabilities. This increase was partially offset by 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 $762,000, or 5.5%, to $14.63 million for the quarter ended June 30, 2022 from $13.87 million for the quarter ended June 30, 2021, primarily due to increases in the average balance of investment securities and the average yield on deposits in banks and CDs. This increase was partially offset by a decrease in the average yield on loans receivable reflecting the decline in deferred SBA PPP loan origination fees recognized between the periods.
Average total interest-earning assets increased by $161.25 million, or 9.9%, to $1.80 billion for the quarter ended June 30, 2022 from $1.64 billion for the quarter ended June 30, 2021. Average investment securities increased by $147.77 million, or 134.6%, average loans receivable increased by $40.34 million, or 3.9% and partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $26.85 million, or 5.5%, between the periods. During the quarter ended June 30, 2022, the accretion of the purchase accounting fair value discount on loans acquired in the October 2018 acquisition of South Sound Bank ("South Sound Acquisition") increased interest income on loans by $63,000 compared to $84,000 for the quarter ended June 30, 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 ended June 30, 2022, there was a total of $246,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $443,000 collected for the quarter ended June 30, 2021. Partially offsetting the increase in the average balance of interest-earning assets was a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased to 3.26% for the quarter ended June 30, 2022 from 3.39% for the quarter ended June 30, 2021.
Also impacting the average yield and average interest-earning asset balances during the current quarter were SBA PPP loans. These SBA 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. For the quarter ended June 30, 2022, average SBA PPP loans were $2.08 million, and the Company recorded $9,000 in interest income and accreted $146,000 in SBA PPP loan origination fees into income. For the quarter ended June 30, 2021, average SBA PPP loans were $118.05 million, and the Company recorded $293,000 in interest income and accreted $1.30 million in SBA PPP loan origination fees into income. At June 30, 2022, SBA PPP deferred loan origination fees of $52,000 remain to be accreted into interest income during the remaining life of the loans.
Total interest expense decreased by $63,000, or 8.9%, to $645,000 for the quarter ended June 30, 2022 from $708,000 for the quarter ended June 30, 2021. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.23% for the quarter ended June 30, 2022 from 0.28% for the quarter ended June 30, 2021. Average interest-bearing liabilities increased by $117.48 million, or 11.6%, to $1.13 billion for the quarter ended June 30, 2022 from $1.01 billion for the quarter ended June 30, 2021, primarily due to
increases in the average balances of savings, NOW checking, and money market accounts partially offset by a decline in the average balance of certificates of deposit accounts.
As a result of these changes, the net interest margin ("NIM") decreased to 3.11% for the quarter ended June 30, 2022 from 3.22% for the quarter ended June 30, 2021.
Net interest income increased by $823,000, or 2.1%, to $39.57 million for the nine months ended June 30, 2022 from $38.75 million for the nine months ended June 30, 2021. The increase in net interest income was primarily due to increases in the average balance of investment securities and the average yield on interest-bearing deposits in banks and CDs, and a decline in average cost of interest-bearing liabilities. This increase was partially offset by a significant decrease in 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 $308,000, or 0.7%, to $41.49 million for the nine months ended June 30, 2022 from $41.18 million for the nine months ended June 30, 2021. The average yield on interest-earning assets decreased to 3.14% for the nine months ended June 30, 2022 from 3.50% for the nine months ended June 30, 2021. Average total interest-earning assets increased by $194.73 million, or 12.4%, to $1.76 billion for the nine months ended June 30, 2022 from $1.57 billion for the nine months ended June 30, 2021. Average loans receivable decreased by $2.56 million, or 0.2%, average investment securities increased by $107.81 million or 110.2%, and average interest-bearing deposits in banks and CDs increased by $89.44 million, or 20.9%, between the periods.
Total interest expense decreased by $515,000, or 21.2%, to $1.92 million for the nine months ended June 30, 2022 from $2.43 million for the nine months ended June 30, 2021. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.23% for the nine months ended June 30, 2022 from 0.34% for the nine months ended June 30, 2021. Average interest-bearing liabilities increased by $125.31 million, or 12.9%, to $1.10 billion for the nine months ended June 30, 2022 from $970.83 million for the nine months ended June 30, 2021, primarily due to increases in the average balances of savings, NOW checking, and money market accounts, partially offset by a decline in the average balance of certificates of deposit accounts.
As a result of these changes, the NIM decreased to 2.99% for the nine months ended June 30, 2022 from 3.30% for the nine months ended June 30, 2021.
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 June 30, |
| | 2022 | | 2021 |
| Average
Balance | | Interest and
Dividends | | Yield/
Cost | | Average
Balance | | Interest and
Dividends | | Yield/
Cost |
| Interest-earning assets: | | | | | | | | | | | |
| Loans receivable (1)(2) | $ | 1,072,933 | | | $ | 12,628 | | | 4.71 | % | | $ | 1,032,591 | | | $ | 13,298 | | | 5.15 | % |
| Investment securities (2) | 257,513 | | | 1,016 | | | 1.58 | | | 109,746 | | | 292 | | | 1.06 | |
| Dividends from mutual funds, FHLB stock and other investments | 6,082 | | | 25 | | | 1.64 | | | 6,093 | | | 28 | | | 1.84 | |
| Interest-bearing deposits in banks and CDs | 460,657 | | | 958 | | | 0.83 | | | 487,508 | | | 247 | | | 0.20 | |
| Total interest-earning assets | 1,797,185 | | | 14,627 | | | 3.26 | | | 1,635,938 | | | 13,865 | | | 3.39 | |
| Non-interest-earning assets | 85,470 | | | | | | | 87,638 | | | | | |
| Total assets | $ | 1,882,655 | | | | | | | $ | 1,723,576 | | | | | |
| | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Savings | $ | 284,659 | | | 59 | | | 0.08 | | | $ | 253,147 | | | 52 | | | 0.08 | |
| Money market | 258,240 | | | 191 | | | 0.30 | | | 196,187 | | | 141 | | | 0.29 | |
| NOW checking | 462,085 | | | 161 | | | 0.14 | | | 416,234 | | | 136 | | | 0.13 | |
| Certificates of deposit | 125,132 | | | 234 | | | 0.75 | | | 141,301 | | | 361 | | | 1.02 | |
| | | | | | | | | | | |
| Long-term borrowings | — | | | — | | | — | | | 5,769 | | | 18 | | | 1.25 | |
| Total interest-bearing liabilities | 1,130,116 | | | 645 | | | 0.23 | | | 1,012,638 | | | 708 | | | 0.28 | |
| Non-interest-bearing deposits | 529,770 | | | | | | | 499,383 | | | | | |
| Other liabilities | 10,170 | | | | | | | 11,217 | | | | | |
| Total liabilities | 1,670,056 | | | | | | | 1,523,238 | | | | | |
| Shareholders' equity | 212,599 | | | | | | | 200,338 | | | | | |
| Total liabilities and | | | | | | | | | | | |
| shareholders' equity | $ | 1,882,655 | | | | | | | $ | 1,723,576 | | | | | |
| | | | | | | | | | | |
| Net interest income | | | $ | 13,982 | | | | | | | $ | 13,157 | | | |
| | | | | | | | | | | |
| Interest rate spread | | | | | 3.03 | % | | | | | | 3.11 | % |
| Net interest margin (3) | | | | | 3.11 | % | | | | | | 3.22 | % |
| Ratio of average interest-earning assets to average interest- bearing liabilities | | | | | 159.03 | % | | | | | | 161.55 | % |
_______________
(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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended June 30, |
| | 2022 | | 2021 |
| Average
Balance | | Interest and
Dividends | | Yield/
Cost | | Average
Balance | | Interest and
Dividends | | Yield/
Cost |
| Interest-earning assets: | | | | | | | | | | | |
| Loans receivable (1)(2) | $ | 1,033,173 | | | $ | 37,870 | | | 4.89 | % | | $ | 1,035,733 | | | $ | 39,406 | | | 5.07 | % |
| Investment securities (2) | 205,667 | | | 2,012 | | | 1.30 | | | 97,857 | | | 877 | | | 1.19 | |
| Dividends from mutual funds, FHLB stock and other investments | 6,004 | | | 80 | | | 1.78 | | | 5,964 | | | 83 | | | 1.86 | |
| Interest-bearing deposits in banks and CDs | 517,323 | | | 1,528 | | | 0.39 | | | 427,881 | | | 816 | | | 0.25 | |
| Total interest-earning assets | 1,762,167 | | | 41,490 | | | 3.14 | | | 1,567,435 | | | 41,182 | | | 3.50 | |
| Non-interest-earning assets | 84,426 | | | | | | | 85,636 | | | | | |
| Total assets | $ | 1,846,593 | | | | | | | $ | 1,653,071 | | | | | |
| | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Savings | $ | 275,684 | | | 171 | | | 0.08 | | | $ | 237,456 | | | 147 | | | 0.08 | |
| Money market | 241,734 | | | 530 | | | 0.29 | | | 181,115 | | | 414 | | | 0.31 | |
| NOW checking | 448,028 | | | 439 | | | 0.13 | | | 396,140 | | | 467 | | | 0.16 | |
| Certificates of deposit | 128,784 | | | 762 | | | 0.79 | | | 147,530 | | | 1,330 | | | 1.21 | |
| Short-term borrowings | 3 | | | — | | | 0.23 | | | 1 | | | — | | | 0.30 | |
| Long-term borrowings | 1,906 | | | 17 | | | 1.19 | | | 8,591 | | | 76 | | | 1.17 | |
| Total interest-bearing liabilities | 1,096,139 | | | 1,919 | | | 0.23 | | | 970,833 | | | 2,434 | | | 0.34 | |
| Non-interest-bearing deposits | 530,038 | | | | | | | 476,628 | | | | | |
| Other liabilities | 9,938 | | | | | | | 10,757 | | | | | |
| Total liabilities | 1,636,115 | | | | | | | 1,458,218 | | | | | |
| Shareholders' equity | 210,478 | | | | | | | 194,853 | | | | | |
| Total liabilities and | | | | | | | | | | | |
| shareholders' equity | $ | 1,846,593 | | | | | | | $ | 1,653,071 | | | | | |
| | | | | | | | | | | |
| Net interest income | | | $ | 39,571 | | | | | | | $ | 38,748 | | | |
| | | | | | | | | | | |
| Interest rate spread | | | | | 2.91 | % | | | | | | 3.16 | % |
| Net interest margin (3) | | | | | 2.99 | % | | | | | | 3.30 | % |
| Ratio of average interest-earning assets to average interest- bearing liabilities | | | | | 160.76 | % | | | | | | 161.45 | % |
| | | | | | | | | | | |
(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.
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
June 30, 2022
compared to three months
ended June 30, 2021
increase (decrease) due to | | Nine months ended
June 30, 2022
compared to nine months
ended June 30, 2021
increase (decrease) due to |
| | Rate | | Volume | | Net
Change | | Rate | | Volume | | Net
Change |
| Interest-earning assets: | | | | | | | | | | | |
| Loans receivable and loans held for sale | $ | (1,176) | | | $ | 506 | | | $ | (670) | | | $ | (1,439) | | | $ | (97) | | | $ | (1,536) | |
| Investment securities | 192 | | | 532 | | | 724 | | | 87 | | | 1,048 | | | 1,135 | |
| Dividends from mutual funds, FHLB stock and other investments | (3) | | | — | | | (3) | | | (3) | | | — | | | (3) | |
| Interest-bearing deposits in banks and CDs | 726 | | | (15) | | | 711 | | | 516 | | | 196 | | | 712 | |
| Total net increase (decrease) in income on interest-earning assets | (261) | | | 1,023 | | | 762 | | | (839) | | | 1,147 | | | 308 | |
| | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Savings | 1 | | | 6 | | | 7 | | | — | | | 24 | | | 24 | |
| Money market | 4 | | | 46 | | | 50 | | | 3 | | | 113 | | | 116 | |
| NOW checking | 9 | | | 16 | | | 25 | | | (39) | | | 11 | | | (28) | |
| Certificates of deposit | (89) | | | (38) | | | (127) | | | (414) | | | (154) | | | (568) | |
| FHLB borrowings | (9) | | | (9) | | | (18) | | | (29) | | | (30) | | | (59) | |
| Total net decrease in expense on interest-bearing liabilities | (84) | | | 21 | | | (63) | | | (479) | | | (36) | | | (515) | |
| | | | | | | | | | | |
| Net increase (decrease) in net interest income | $ | (177) | | | $ | 1,002 | | | $ | 825 | | | $ | (360) | | | $ | 1,183 | | | $ | 823 | |
Provision for Loan Losses: There was no provision for loan losses for the quarters ended June 30, 2022 and June 30, 2021. For the quarter ended June 30, 2022, there were no net charge offs compared to net recoveries of $35,000 for the quarter ended June 30, 2021. Non-accrual loans decreased by $563,000, or 19.7%, to $2.29 million at June 30, 2022 from $2.85 million at September 30, 2021 and increased by $262,000, or 12.9%, from $2.03 million at June 30, 2021. Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $507,000, or 16.7%, to $2.53 million at June 30, 2022, from $3.04 million at September 30, 2021 and decreased by $410,000, or 13.9%, from $2.94 million one year ago.
The $1.32 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at June 30, 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.
There was no provision for loans losses for the nine months ended June 30, 2022 and 2021. For the nine months ended June 30, 2022, there were net charge-offs of $36,000 compared to net recoveries of $55,000 for the nine months ended June 30, 2021.
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 June 30, 2022 was $127,000 compared to $247,000 at September 30, 2021 and $171,000 at June 30, 2021.
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 $295,000 at June 30, 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 $13.43 million at June 30, 2022 (1.22% of loans receivable and 586.3% 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 $13.47 million (1.37% of loans receivable and 471.9% of non-performing loans) at September 30, 2021 and $13.47 million (1.33% of loans receivable and 663.8% of non-performing loans) at June 30, 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 decline in national and local economic conditions, as a result of the COVID-19 pandemic or 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 $1.16 million, or 27.3%, to $3.10 million for the quarter ended June 30, 2022 from $4.27 million for the quarter ended June 30, 2021. This decrease was primarily due to a $1.35 million decrease in net gain on sales of loans, a $179,000 decrease in the net valuation allowance on loan servicing rights and smaller decreases in several other categories. These decreases to non-interest income were partially offset by a $104,000 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 and a decrease in the average pricing margin compared to the same period last year.
Total non-interest income for the nine months ended June 30, 2022 decreased by $4.08 million, or 29.8%, to $9.63 million from $13.71 million for the nine months ended June 30, 2021. This decrease was primarily due to a $4.03 million decrease in net gain on sales of loans, and smaller decreases in several other categories. These decreases were partially offset by a $113,000 increase in ATM and debit card interchange transaction fees, a $96,000 increase in the net valuation recovery on loan servicing rights and smaller increases in several other categories.
Non-interest Expense: Total non-interest expense increased by $1.26 million, or 14.6%, to $9.87 million for the quarter ended June 30, 2022 from $8.61 million for the quarter ended June 30, 2021. This increase was primarily due to a $689,000 increase in salaries and employee benefits, a $318,000 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, 2021) and the hiring of additional lending personnel. The increase in professional fees was primarily due to higher legal and consulting fees. The efficiency ratio for the current quarter increased to 57.80% from 49.43% for the comparable quarter one year ago.
Total non-interest expense increased by $2.90 million, or 11.3% to $28.47 million for the nine months ended June 30, 2022 from $25.57 million for the nine months ended June 30, 2021. This increase was primarily due to $1.66 million increase in salaries and employee benefits expense, a $498,000 increase in professional fess, a $454,000 increase in the other non-interest expense and smaller increases and decreases in several other categories. The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2021) and the hiring of additional lending personnel. The increase in professional fees was primarily due to higher legal and consulting fees. The increase in the other non-interest expense category was primarily related to refunds issued to customers for deposit account fees that were determined to have been charged in error after the Bank's core system conversion in 2019 and the increase in professional fees was primarily due to higher legal and consulting fees.
Provision for Income Taxes: The provision for income taxes decreased by $314,000, or 17.6%, to $1.47 million for the quarter ended June 30, 2022 from $1.79 million for the quarter ended June 30, 2021. The provision for income taxes decreased by $1.14 million, or 21.5% to $4.18 million for the nine months ended June 30, 2022 from $5.32 million for the nine months ended June 30, 2021. These decreases in the provision for income taxes were primarily due to lower income before income taxes. The Company's effective income tax rate was 20.42% for the quarter ended June 30, 2022 and 20.27% for the quarter ended June 30, 2021. The Company's effective tax rate was 20.15% for the nine months ended June 30, 2022 and 19.79% for the nine months ended June 30, 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 June 30, 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 37.28%. At June 30, 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 $474.66 million available for borrowings with the FHLB at June 30, 2022. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral. At June 30, 2022, the Bank had no outstanding balance on this borrowing line, under which $87.72 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At June 30, 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 nine months ended June 30, 2022 and 2021, the Bank originated $435.92 million and $470.04 million of loans, respectively. At June 30, 2022, the Bank had loan commitments totaling $178.55 million and undisbursed construction loans in process totaling $102.04 million. Investment securities purchased during the nine months ended June 30, 2022 and 2021 totaled $167.60 million and $52.50 million, respectively.
The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the nine months ended June 30, 2022 and 2021, the Bank sold $51.05 million and $126.19 million, respectively, in loans and loan participation interests. During the three and nine months ended June 30, 2022, the Bank received $64.02 million and $249.16 million in principal repayments, respectively.
The Bank’s liquidity has been positively impacted by increases in deposit levels. During the nine months ended June 30, 2022, deposits increased by $93.56 million from September 30, 2021. The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities decreased to $719.38 million at June 30, 2022 from $740.96 million at September 30, 2021. CDs that are scheduled to mature in less than one year from June 30, 2022 totaled $78.65 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 three months ending September 30, 2022 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 $0.22 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 2022 at the rate of $0.22 per share, the average total dividend paid each quarter would be approximately $1.83 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).
For the remaining three months ending September 30, 2022, the Bank projects that fixed commitments will include $80,000 of operating lease payments. There are no scheduled payments and maturities of FHLB borrowings during the fiscal year 2022, but due to favorable borrowing terms, the Company decided in January 2022 that it was advantageous to payoff $5.00 million in FHLB borrowings. In addition, at June 30, 2022, there were other future obligations and accrued expenses of $7.23 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.
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 June 30, 2022, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $2.37 million.
Capital Resources
The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC'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 at June 30, 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 the FDIC. Based on capital levels at June 30, 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 at June 30, 2022 to its minimum regulatory capital requirements at that date (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Regulatory
Minimum To
Be “Adequately
Capitalized” | | To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Leverage Capital Ratio: | | | | | | | | | | | |
| Tier 1 capital | $197,247 | | | 10.61 | % | | $74,375 | | | 4.00 | % | | $92,969 | | | 5.00 | % |
| Risk-based Capital Ratios: | | | | | | | | | | | |
| Common equity Tier 1 capital | 197,247 | | | 18.31 | | | 48,479 | | | 4.50 | | | 70,026 | | | 6.50 | |
| Tier 1 capital | 197,247 | | | 18.31 | | | 64,639 | | | 6.00 | | | 86,186 | | | 8.00 | |
| Total capital | 210,717 | | | 19.56 | | | 86,186 | | | 8.00 | | | 107,732 | | | 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 June 30, 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 June 30, 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 June 30, 2022 (dollars in thousands):
| | | | | | | | | | | |
| Actual |
| | Amount | | Ratio |
| Leverage Capital Ratio: | | | |
| Tier 1 capital | $200,178 | | | 10.72 | % |
| Risk-based Capital Ratios: | | | |
| Common equity Tier 1 capital | 200,178 | | | 18.57 | |
| Tier 1 capital | 200,178 | | | 18.57 | |
| Total capital | 213,658 | | | 19.82 | |
Key Financial Ratios and Data
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
PERFORMANCE RATIOS: | | | | | | | |
| Return on average assets | 1.22 | % | | 1.63 | % | | 1.19 | % | | 1.74 | % |
| Return on average equity | 10.80 | % | | 14.02 | % | | 10.48 | % | | 14.76 | % |
| Net interest margin | 3.11 | % | | 3.22 | % | | 2.99 | % | | 3.30 | % |
| Efficiency ratio | 57.80 | % | | 49.43 | % | | 57.87 | % | | 48.75 | % |
