Timberland Bancorp Inc 10-Q for FY2024 Q1
Timberland Bancorp Inc (TSBK)
10-Q
2024-02-12
For: 2023-12-31
View Original
Added on
April 07, 2026
About this 10-Q
Timberland Bancorp Inc filed this 10-Q on February 12, 2024, covering the quarter ended December 31, 2023 (FY2024 Q1).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $6.3M
- down 16.1% from net income of $7.51M a year earlier
- Diluted EPS
- $0.77
- down 14.4% from $0.90 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2023
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____.
Commission file number 000-23333
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ___
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes _☒_ No __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _☒ _
As of February 1, 2024, there were 8,122,908 shares of the registrant's common stock, $.01 par value per share outstanding.
INDEX
| Page | |||||||||||
Item 4. | |||||||||||
| Certifications | |||||||||||
| Exhibit 31.1 | |||||||||||
| Exhibit 31.2 | |||||||||||
| Exhibit 32 | |||||||||||
| Exhibit 101 | |||||||||||
| Exhibit 104 | |||||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2023 and September 30, 2023
(Dollars in thousands, except per share amounts)
| December 31, 2023 | September 30, 2023 | ||||||||||
| (Unaudited) | * | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Cash and due from financial institutions | $ | $ | |||||||||
| Interest-bearing deposits in banks | |||||||||||
| Total cash and cash equivalents | |||||||||||
| Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value) | |||||||||||
Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $ | |||||||||||
| Investment securities available for sale, at fair value | |||||||||||
| Investments in equity securities, at fair value | |||||||||||
| Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost | |||||||||||
| Other investments, at cost | |||||||||||
| Loans held for sale | |||||||||||
Loans receivable, net of allowance for credit losses of $ | |||||||||||
| Premises and equipment, net | |||||||||||
| Accrued interest receivable | |||||||||||
| Bank owned life insurance (“BOLI”) | |||||||||||
| Goodwill | |||||||||||
| Core deposit intangible (“CDI”), net | |||||||||||
| Loan servicing rights, net | |||||||||||
| Operating lease right-of-use ("ROU") assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Liabilities | |||||||||||
| Deposits: | |||||||||||
| Non-interest-bearing demand | $ | $ | |||||||||
| Interest-bearing | |||||||||||
| Total deposits | |||||||||||
| FHLB borrowings | |||||||||||
| Operating lease liabilities | |||||||||||
| Other liabilities and accrued expenses | |||||||||||
| Total liabilities | $ | $ | |||||||||
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements
3
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
December 31, 2023 and September 30, 2023
(Dollars in thousands, except per share amounts)
| December 31, 2023 | September 30, 2023 | ||||||||||
| (Unaudited) | * | ||||||||||
| Commitments and contingent liabilities (see Note 12) | |||||||||||
| Shareholders’ equity | |||||||||||
Preferred stock, $ | $ | $ | |||||||||
Common stock, $ | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements
4
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 2023 and 2022
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Interest and dividend income | |||||||||||||||||||||||
| Loans receivable and loans held for sale | $ | $ | |||||||||||||||||||||
| Investment securities | |||||||||||||||||||||||
| Dividends from mutual funds, FHLB stock and other investments | |||||||||||||||||||||||
| Interest-bearing deposits in banks and CDs | |||||||||||||||||||||||
| Total interest and dividend income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||
| FHLB borrowings | |||||||||||||||||||||||
| Total interest expense | |||||||||||||||||||||||
| Net interest income | |||||||||||||||||||||||
| Provision for (recapture of) credit losses | |||||||||||||||||||||||
| Provision for credit losses - loans | |||||||||||||||||||||||
| Recapture of credit losses - investment securities | ( | ||||||||||||||||||||||
| Recapture of credit losses - unfunded commitments | ( | ||||||||||||||||||||||
| Total provision for credit loss - net | |||||||||||||||||||||||
| Net interest income after provision for (recapture of) credit losses | |||||||||||||||||||||||
| Non-interest income | |||||||||||||||||||||||
| Net recoveries on investment securities | |||||||||||||||||||||||
| Service charges on deposits | |||||||||||||||||||||||
| ATM and debit card interchange transaction fees | |||||||||||||||||||||||
| BOLI net earnings | |||||||||||||||||||||||
| Gain on sales of loans, net | |||||||||||||||||||||||
| Escrow fees | |||||||||||||||||||||||
| Other, net | |||||||||||||||||||||||
| Total non-interest income, net | |||||||||||||||||||||||
See notes to unaudited consolidated financial statements
5
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three months ended December 31, 2023 and 2022
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Non-interest expense | |||||||||||||||||||||||
| Salaries and employee benefits | $ | $ | |||||||||||||||||||||
| Premises and equipment | |||||||||||||||||||||||
| Advertising | |||||||||||||||||||||||
| ATM and debit card interchange transaction fees | |||||||||||||||||||||||
| Postage and courier | |||||||||||||||||||||||
| State and local taxes | |||||||||||||||||||||||
| Professional fees | |||||||||||||||||||||||
| Federal Deposit Insurance Corporation ("FDIC") insurance | |||||||||||||||||||||||
| Loan administration and foreclosure | |||||||||||||||||||||||
| Technology and telecommunication expenses | |||||||||||||||||||||||
| Deposit operations | |||||||||||||||||||||||
| Amortization of CDI | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total non-interest expense, net | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
Net income | $ | $ | |||||||||||||||||||||
| Net income per common share | |||||||||||||||||||||||
| Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Dividends paid per common share | $ | $ | |||||||||||||||||||||
See notes to unaudited consolidated financial statements
6
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31, 2023 and 2022
(Dollars in thousands)
(Unaudited)
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $ | ( | ||||||||||||||||||||||
| Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes: | |||||||||||||||||||||||
Accretion of OTTI on investment securities held to maturity, net of income taxes of $ | |||||||||||||||||||||||
| Total other comprehensive income (loss), net of income taxes | ( | ||||||||||||||||||||||
| Total comprehensive income | $ | $ | |||||||||||||||||||||
See notes to unaudited consolidated financial statements
7
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended December 31, 2023 and 2022
(Dollars in thousands, except per share amounts)
(Unaudited)
| Common Stock | Accumulated Other Compre-hensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends ($ | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Adoption of , net of tax | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
See notes to unaudited consolidated financial statements
8
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2023 and 2022
(Dollars in thousands)
(Unaudited)
| Three Months Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | |||||||||||
| Depreciation | |||||||||||
| Accretion of discount on purchased loans | ( | ( | |||||||||
| Amortization of CDI | |||||||||||
| Stock-based compensation expense | |||||||||||
| Net recoveries on investment securities | ( | ( | |||||||||
| Change in fair value of investments in equity securities | ( | ( | |||||||||
| Accretion of discounts and premiums on securities | ( | ( | |||||||||
| Gain on sales of loans, net | ( | ( | |||||||||
| Loans originated for sale | ( | ( | |||||||||
| Proceeds from sales of loans | |||||||||||
| Amortization of loan servicing rights | |||||||||||
| BOLI net earnings | ( | ( | |||||||||
| Increase in deferred loan origination fees | |||||||||||
| Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Net decrease (increase) in CDs held for investment | ( | ||||||||||
| Purchase of investment securities held to maturity | ( | ( | |||||||||
| Purchase of investment securities available for sale | ( | ||||||||||
| Proceeds from maturities and prepayments of investment securities held to maturity | |||||||||||
| Proceeds from maturities and prepayments of investment securities available for sale | |||||||||||
| Redemption of FHLB stock | |||||||||||
| Increase in loans receivable, net | ( | ( | |||||||||
| Purchases of premises and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
See notes to unaudited consolidated financial statements
9
TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the three months ended December 31, 2023 and 2022
(Dollars in thousands)
(Unaudited)
| Three Months Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from financing activities | |||||||||||
| Net increase (decrease) in deposits | $ | $ | ( | ||||||||
| Repayments of FHLB borrowings | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Payment of dividends | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Interest paid | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing activities | |||||||||||
| Other comprehensive income (loss) related to investment securities | $ | $ | ( | ||||||||
| Adjustment to retained earnings, net of deferred tax; - adoption of ASU 2016-13 | $ | ( | $ | ||||||||
See notes to unaudited consolidated financial statements
10
Timberland Bancorp, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation: The accompanying unaudited consolidated financial statements of Timberland Bancorp, Inc. and its wholly-owned subsidiary, Timberland Bank (the "Bank") (collectively, "the Company") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023 (“2023 Form 10-K”). The unaudited consolidated results of operations for the three months ended December 31, 2023 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2024.
(b) Principles of Consolidation: The unaudited consolidated financial statements include the accounts of the Company and the Bank’s wholly-owned subsidiary, Timberland Service Corporation. All significant inter-company transactions and balances have been eliminated in consolidation.
(c) Operating Segment: The Company has one reportable operating segment which is defined as community banking in western Washington under the operating name, "Timberland Bank."
(d) The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
(e) Certain prior period amounts have been reclassified to conform to the December 31, 2023 presentation with no change to previously reported net income or total shareholders’ equity.
(2) INVESTMENT SECURITIES
Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of December 31, 2023 and September 30, 2023 (dollars in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Allowance for Credit Losses ("ACL") | |||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||
| Held to Maturity | |||||||||||||||||||||||||||||
| U.S. Treasury and U.S. government agency securities | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| Mortgage-backed securities ("MBS"): | |||||||||||||||||||||||||||||
| U.S. government agencies | ( | ||||||||||||||||||||||||||||
| Private label residential | ( | ||||||||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||||||||
| Bank issued trust preferred securities | ( | ||||||||||||||||||||||||||||
| Total held to maturity | $ | $ | ( | $ | $ | ||||||||||||||||||||||||
11
| December 31, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| Available for Sale | |||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||
| U.S. government agencies | $ | $ | $ | ( | $ | ||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||
| Held to Maturity | |||||||||||||||||||||||
| U.S. treasury and U.S. government agency securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| MBS: | |||||||||||||||||||||||
| U.S. government agencies | ( | ||||||||||||||||||||||
| Private label residential | ( | ||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||
| Bank issues trust preferred securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
| Available for Sale | |||||||||||||||||||||||
| MBS: U.S. government agencies | $ | $ | $ | ( | $ | ||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||
Held to maturity and available for sale investment securities with unrealized losses were as follows as of December 31, 2023 (dollars in thousands):
| Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Estimated Fair Value | Gross Unrealized Losses | Quantity | Estimated Fair Value | Gross Unrealized Losses | Quantity | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||
| Held to maturity | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury and U.S. government agency securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Private label residential | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Bank issued trust preferred securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||||||||||||||||||||||||||
| MBS: U.S. government agencies | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
12
Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2023 (dollars in thousands):
| Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Estimated Fair Value | Gross Unrealized Losses | Quantity | Estimated Fair Value | Gross Unrealized Losses | Quantity | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||
| Held to maturity | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury and U.S. government agency securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government agencies | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Private label residential | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Municipal securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Bank issued trust preferred securities | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||||||||||||||||||||||||||
| MBS: U.S. government agencies | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||
During the three months ended December 31, 2023, the Company recorded a $1,000 net realized loss on 13 held to maturity investment securities all of which had been recognized previously as credit loss. During the three months ended December 31, 2022, the Company recorded a $7,000 net realized loss on 14 held to maturity investment securities all of which had been recognized previously as credit loss.
The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $204.13 million and $201.82 million at December 31, 2023 and September 30, 2023, respectively.
The contractual maturities of debt securities at December 31, 2023 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
| Held to Maturity | Available for Sale | ||||||||||||||||||||||
| Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | ||||||||||||||||||||
| Due within one year | $ | $ | $ | $ | |||||||||||||||||||
| Due after one year to five years | |||||||||||||||||||||||
| Due after five years to ten years | |||||||||||||||||||||||
| Due after ten years | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
13
Credit Quality Indicators and Allowance for Credit Losses
Available for Sale Investment Securities
The Company assesses each available for sale investment security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis results from a credit loss or other factors. The Company did not record an ACL on any available for sale debt securities at December 31, 2023 or upon adoption of ASU 2016-13 on October 1, 2023. As of both dates, the Company considered the unrealized losses across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. The Company expects the fair value of these securities to recover as the securities approach their maturity dates or sooner if market yields for such securities decline. The Company does not believe that these securities are other than temporarily impaired because of their credit quality or related to any issuer or industry specific event. The Company has the ability and intent to hold the investments until the fair value recovers.
Held to Maturity Investment Securities
The Company measures expected credit losses on held to maturity investment securities, which are comprised of U.S. government agency and U.S. government mortgage-backed securities, private label mortgage-backed securities, municipal, and other bonds. The Company’s agency and mortgage-backed securities that are issued by U.S. government entities and agencies are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no ACL has been established for these securities. The ACL on the private label mortgage-backed securities, municipal, and other bonds within the held to maturity securities portfolio is calculated using the probability of default/loss given default ("PD/LGD") method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. At December 31, 2023, the allowance for credit losses on the held to maturity securities portfolio totaled $82,000 .
The following table sets forth information for the three months ended December 31, 2023 regarding activity in the ACL by portfolio segment (dollars in thousands):
| Three Months Ended December 31, 2023 | ||||||||||||||||||||||||||
| Held to Maturity | Beginning Allowance | Impact of Adopting CECL (ASU 2016-13) | Provision for (Recapture of) Credit Losses | Ending Allowance | ||||||||||||||||||||||
| MBS: | ||||||||||||||||||||||||||
| Private label residential | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Bank issued trust preferred securities | ( | |||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||
The ACL on held to maturity investment securities is included within investment securities held to maturity on the consolidated balance sheets. Changes in the ACL are recorded within provision for (recapture of) credit losses on the consolidated income statement.
Accrued interest receivable on held to maturity investment securities totaled $908,000 at December 31, 2023 and is included
within accrued interest income receivable on the consolidated balance sheet. This amount is excluded from the estimate
of expected credit losses. Held to maturity debt securities are typically classified as non-accrual when the contractual
payment of principal or interest has become 90 days past due or management has serious doubts about the further
collectability of principal or interest. When held to maturity debt securities are placed on non-accrual status, unpaid interest
credited to income is reversed. The Company had $85,000 of private label mortgage-backed held to maturity investment securities in non-accrual status at December 31, 2023.
The Company monitors the credit quality of debt securities held to maturity through the use of credit ratings from Moody's, S&P and Fitch. The Company monitors the credit ratings on a quarterly basis.
14
The following table sets forth the Company's held to maturity investment securities at December 31, 2023 by credit quality indicator:
| Credit Ratings | ||||||||||||||||||||||||||
| As of December 31, 2023 | AAA/AA/A | BBB/BB/B | Unrated | Total | ||||||||||||||||||||||
| Held to Maturity | ||||||||||||||||||||||||||
| U.S. Treasury and U.S. government agency securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Mortgage-backed securities ("MBS"): | ||||||||||||||||||||||||||
| U.S. government agencies | ||||||||||||||||||||||||||
| Private label residential | ||||||||||||||||||||||||||
| Municipal securities | ||||||||||||||||||||||||||
| Bank issued trust preferred securities | ||||||||||||||||||||||||||
| Total held to maturity | $ | $ | $ | $ | ||||||||||||||||||||||
Prior to adopting ASU 2016-13, the Company bifurcated OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management was required in this analysis that included, but not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans. The amounts written off due to credit loss remain and continue to be recovered on a cash basis.
The following table presents a roll forward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the three months ended December 31, 2023 and 2022 (dollars in thousands):
| Three Months Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Beginning balance of credit loss | $ | $ | |||||||||
| Subtractions: | |||||||||||
| Net realized loss previously recorded as credit losses | ( | ( | |||||||||
| Recapture of prior credit loss | ( | ( | |||||||||
| Ending balance of credit loss | $ | $ | |||||||||
(3) GOODWILL AND CDI
Goodwill is initially recorded when the purchase price paid in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. The Company performs an annual review during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. For purposes of goodwill impairment testing, the services offered through the Bank and its subsidiary are managed as one strategic unit and represent the Company's only reporting unit.
The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair
15
value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.
The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.
Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. The Company performed its fiscal year 2023 goodwill impairment test during the quarter ended June 30, 2023 with the assistance of an independent third-party firm specializing in goodwill impairment valuations for financial institutions. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount, and, therefore, goodwill was determined not to be impaired at May 31, 2023.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.
As of December 31, 2023, management believes that there have been no events or changes in the circumstances since May 31, 2023 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. If adverse economic conditions or any decreases in the Company's stock price and market capitalization were deemed other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operations and financial condition. The recorded amount of goodwill at December 31, 2023 and September 30, 2023 remained unchanged at $15.13
16
(4) LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable by portfolio segment consisted of the following at December 31, 2023 and September 30, 2023 (dollars in thousands):
| December 31, 2023 | September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family (1) | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction - custom and owner/builder | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction - speculative one- to four-family | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction - commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction - multi-family | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction - land development | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total mortgage loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans receivable | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Undisbursed portion of construction loans in process (LIP") | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred loan origination fees, net | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACL | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans receivable, net | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
_____________________________ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Does not include one- to four-family loans held for sale totaling $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable at December 31, 2023 and September 30, 2023 are reported net of unamortized discounts totaling $182,000 and $192,000 , respectively.
17
Credit Quality Indicators
The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:
Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards.
Watch: Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.
Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.
Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.
Doubtful: Loans in this classification have the weaknesses of substandard loans with the additional characteristic that the weaknesses make the collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. At December 31, 2023 and September 30, 2023, there were no loans classified as doubtful.
Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At December 31, 2023 and September 30, 2023, there were no loans classified as loss.
The following table sets forth the Company's loan portfolio at December 31, 2023 by risk attribute and year of origination as well as current period gross charge-offs (dollars in thousands):
| Term Loans Amortized Cost Basis by Origination Fiscal Year | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Type | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans | Total Loans Receivable | ||||||||||||||||||||||||||||||||||||||||||
| One-to four-family | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total one- to four-family | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total multi-family | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
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| Term Loans Amortized Cost Basis by Origination Fiscal Year | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Type | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans | Total Loans Receivable | ||||||||||||||||||||||||||||||||||||||||||
| Construction-custom & owner/builder | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total construction | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Construction-speculative one-to four-family | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total construction | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Construction-commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total construction | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Construction-multi-family | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total construction | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Construction-land development | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total construction | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total land | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total home equity | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
19
| Term Loans Amortized Cost Basis by Origination Fiscal Year | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Type | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans | Total Loans Receivable | ||||||||||||||||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other consumer | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial business | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| SBA PPP | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total SBA PPP | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total loans receivable, gross (net of construction LIP) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans receivable | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Current period gross charge-off | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
Allowance for Credit Losses
The Company adopted the new accounting standard for the ACL, commonly referred to as the current expected credit losses ("CECL") methodology, as of October 1, 2023. All disclosures as of and for the three months ended December 31, 2023 are presented in accordance with the new accounting standard. The comparative financial periods prior to the adoption of this new accounting standard are presented and disclosed under previously applicable GAAP's incurred loss methodology, which is not directly comparable to the new, CECL methodology. See also Note 10, Recent Accounting Pronouncements. As a result of implementing this new accounting standard, there was a one-time adjustment to the fiscal year 2024 opening allowance balance of $461,000 related to loans held for for investment. The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. For loans that do not share similar risk characteristics and cannot be evaluated on a collective basis, the Company will evaluate the loan individually. The Company estimates the expected credit losses over the loans' contractual terms, adjusted for expected prepayments. The ACL calculation is
20
calculated for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. Management has adopted the discounted cash flow ("DCF") methodology for all segments. The Company incorporates a reasonable and supportable forecast that utilizes current period national gross domestic product ("GDP") and national unemployment figures. Each of the loan segments are impacted by these factors. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate presentation of future prepayment activity. Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated selling costs.
When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the ACL. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.
Management's evaluation of the ACL is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company's historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, a detailed analysis of individually evaluated loans and other factors as deemed appropriate. Management also assesses the risk related to reasonable and supportable forecasts that are used. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as integral part of their examination process, periodically review the Company's allowance for credit losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
The following tables set forth information for the three months ended December 31, 2023 and 2022 regarding activity in the ACL by portfolio segment (dollars in thousands):
| Three Months Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Beginning Allowance | Impact of Adopting CECL (ASU 2016-13) | Provision for (Recapture of) Credit Losses | Charge- offs | Recoveries | Ending Allowance | ||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||
| One- to four-family | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Multi-family | ( | ||||||||||||||||||||||||||||||||||
| Commercial | ( | ||||||||||||||||||||||||||||||||||
| Construction – custom and owner/builder | ( | ||||||||||||||||||||||||||||||||||
| Construction – speculative one- to four-family | ( | ||||||||||||||||||||||||||||||||||
| Construction – commercial | ( | ||||||||||||||||||||||||||||||||||
| Construction – multi-family | ( | ||||||||||||||||||||||||||||||||||
| Construction – land development | ( | ||||||||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | ( | ||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
21
| Three Months Ended December 31, 2022 | |||||||||||||||||||||||||||||
| Beginning Allowance | Provision for (Recapture of) Loan Losses | Charge- offs | Recoveries | Ending Allowance | |||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Multi-family | |||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Construction – custom and owner/builder | ( | ||||||||||||||||||||||||||||
| Construction – speculative one- to four-family | ( | ||||||||||||||||||||||||||||
| Construction – commercial | ( | ||||||||||||||||||||||||||||
| Construction – multi-family | |||||||||||||||||||||||||||||
| Construction – land development | ( | ||||||||||||||||||||||||||||
| Land | ( | ||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||
| Home equity and second mortgage | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following tables present information on the allowance for loan losses by portfolio segment at September 30, 2023 prior to the adoption of ASU 2016-13 (dollars in thousands):
| Allowance for Credit Losses | Recorded Investment in Loans | ||||||||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total | ||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Multi-family | $ | ||||||||||||||||||||||||||||||||||
| Commercial | $ | ||||||||||||||||||||||||||||||||||
Construction – custom and owner/builder | $ | ||||||||||||||||||||||||||||||||||
Construction – speculative one- to four-family | $ | ||||||||||||||||||||||||||||||||||
| Construction – commercial | $ | ||||||||||||||||||||||||||||||||||
| Construction – multi-family | $ | ||||||||||||||||||||||||||||||||||
| Construction – land development | $ | ||||||||||||||||||||||||||||||||||
| Land | $ | ||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||
Home equity and second mortgage | $ | ||||||||||||||||||||||||||||||||||
| Other | $ | ||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||
| SBA PPP loans | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
22
Non-Accrual Loans
When a loan is 90 days delinquent the accrual of interest is generally discontinued and the loan is placed on non-accrual. All interest accrued but not collected for loans placed on non-accrual is reversed out of interest income. Generally, payments received on non-accrual loans are applied to reduce the outstanding principal balance of the loan. At times interest may be accounted for on a cash basis, depending on the collateral value and the borrowers payment history. A loan is generally not removed from non-accrual until all delinquent principal, interest and late fees have been brought current and the borrower demonstrates repayment ability over a a period of not less than six months and all taxes are current.
The following tables present an analysis of loans by aging category and portfolio segment at December 31, 2023 and September 30, 2023 (dollars in thousands):
| 30–59 Days Past Due | 60-89 Days Past Due | Non- Accrual (1) | Past Due 90 Days or More and Still Accruing | Total Past Due | Current | Total Loans | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Multi-family | |||||||||||||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||
| Construction – custom and owner/builder | |||||||||||||||||||||||||||||||||||||||||
| Construction – speculative one- to four-family | |||||||||||||||||||||||||||||||||||||||||
| Construction – commercial | |||||||||||||||||||||||||||||||||||||||||
| Construction – multi-family | |||||||||||||||||||||||||||||||||||||||||
| Construction – land development | |||||||||||||||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | |||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||||||||
| SBA PPP loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.
23
| 30–59 Days Past Due | 60-89 Days Past Due | Non- Accrual (1) | Past Due 90 Days or More and Still Accruing | Total Past Due | Current | Total Loans | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Multi-family | |||||||||||||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||
| Construction – custom and owner/builder | |||||||||||||||||||||||||||||||||||||||||
| Construction – speculative one- to four-family | |||||||||||||||||||||||||||||||||||||||||
| Construction – commercial | |||||||||||||||||||||||||||||||||||||||||
| Construction – multi-family | |||||||||||||||||||||||||||||||||||||||||
| Construction – land development | |||||||||||||||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | |||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||||||||
| SBA PPP loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.
The following tables present an analysis of loans by credit quality indicator and portfolio segment at September 30, 2023 (dollars in thousands):
| Loan Grades | |||||||||||||||||||||||||||||
| September 30, 2023 | Pass | Watch | Special Mention | Substandard | Total | ||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Multi-family | |||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Construction – custom and owner/builder | |||||||||||||||||||||||||||||
| Construction – speculative one- to four-family | |||||||||||||||||||||||||||||
| Construction – commercial | |||||||||||||||||||||||||||||
| Construction – multi-family | |||||||||||||||||||||||||||||
| Construction – land development | |||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||
| Home equity and second mortgage | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
Commercial business loans | |||||||||||||||||||||||||||||
| SBA PPP loans | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
24
At December 31, 2023, the Company had $1.72 million of non-accrual loans with an ACL of $319,000 and $1.65 million of non-accrual loans with no ACL. The following table is a summary of the amortized cost of collateral dependent non-accrual loans as of December 31, 2023 (in thousands):
| Recorded Investment | Related ACL | ||||||||||
| Mortgage loans: | |||||||||||
| One- to four-family | $ | $ | |||||||||
| Commercial | |||||||||||
| Construction - custom & owner/builder | |||||||||||
| Consumer loans: | |||||||||||
| Home equity & second mortgage | |||||||||||
| Commercial business loans | |||||||||||
| Total | $ | $ | |||||||||
Impaired Loans
Prior to the adoption of CECL, a loan was considered impaired when it was probable that the Company would be unable to collect all amounts (principal and interest) when due according to the original contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan was identified as being impaired, the amount of the impairment was measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price was used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time that such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for credit losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical.
25
The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of September 30, 2023 and for the year then ended (dollars in thousands):
| Recorded Investment | Unpaid Principal Balance (Loan Balance Plus Charge Off) | Related Allowance | Year to Date ("YTD") Average Recorded Investment (1) | YTD Interest Income Recognized (1) | YTD Cash Basis Interest Income Recognized (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business loans | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| With an allowance recorded: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
______________________________________________
(1)For the year ended September 30, 2023 .
26
The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of December 31, 2022 and for three months then ended (dollars in thousands):
| Recorded Investment | Unpaid Principal Balance (Loan Balance Plus Charge Off) | Related Allowance | YTD Average Recorded Investment (1) | YTD Interest Income Recognized (1) | YTD Cash Basis Interest Income Recognized (1) | ||||||||||||||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | — | $ | $ | $ | ||||||||||||||||||||||||||||
| Commercial | — | ||||||||||||||||||||||||||||||||||
| Land | — | ||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | — | ||||||||||||||||||||||||||||||||||
| Other | — | ||||||||||||||||||||||||||||||||||
| Commercial business loans | — | ||||||||||||||||||||||||||||||||||
| Subtotal | — | ||||||||||||||||||||||||||||||||||
| With an allowance recorded: | |||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||
| Subtotal | |||||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||
| Mortgage loans: | |||||||||||||||||||||||||||||||||||
| One- to four-family | |||||||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||
| Home equity and second mortgage | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Commercial business loans | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
_____________________________________________
(1) For the three months ended December 31, 2022.
Troubled debt restructurings ("TDRs")
On October 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (ASU 2016-13). This ASU eliminated the accounting guidance for TDR loans for creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. No loans to borrowers experiencing financial difficulty were modified in the three months ended December 31, 2023. At December 31, 2022, the Company had $2.58 million of TDRs, all of which were paying as agreed. There were no new TDRs for the three months ended December 31, 2022.
In accordance with the Company's policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. The outstanding balance of a secured loan that is in excess of the net realizable value is generally charged-off if no payments are received for four or five consecutive months. However, charge-off's are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential source of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is promptly charged off.
27
(5) LEASES
At December 31, 2023, the Company has operating leases for two retail bank branch offices and an administrative office. The Company's leases have remaining lease terms of to eight years , and include options to extend the leases from two to five years . Lease extensions are not certain, and the Company evaluates each lease based on the specific circumstances for the location to determine the probability of exercising the extensions in the calculation of operating lease ROU assets and lease liabilities.
The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three months ended December 31, 2023 and 2022 (dollars in thousands):
| Three Months Ended December 31, | |||||||||||||||||||||||
| Lease cost: | 2023 | 2022 | |||||||||||||||||||||
| Operating lease cost | $ | $ | |||||||||||||||||||||
| Short-term lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | |||||||||||||||||||||
The following tables provide supplemental information related to operating leases at or for the three months ended December 31, 2023 and year ended September 30, 2023 (dollars in thousands):
| At or For the Three Months Ended December 31, 2023 | At or For the Year Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||||||||||||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||||||||||||||||||||||||||
| Weighted average remaining lease term-operating leases | |||||||||||||||||||||||||||||||||||
| Weighted average discount rate-operating leases | % | % | |||||||||||||||||||||||||||||||||
The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate used to estimate the present value of future lease payments in calculating the value of the ROU asset and lease liability was determined by utilizing the FHLB fixed-rate credit advance borrowing rate for the term correlating to the remaining term of each lease.
Maturities of operating lease liabilities at December 31, 2023 for future fiscal years are as follows (dollars in thousands):
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | |||||
| Total | $ | ||||
28
(6) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period without considering any dilutive items. Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period. Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period. Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock.
Information regarding the calculation of basic and diluted net income per common share for the three months ended December 31, 2023 and 2022 is as follows (dollars in thousands, except per share amounts):
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Basic net income per common share computation | |||||||||||||||||||||||
| Numerator – net income | $ | $ | |||||||||||||||||||||
| Denominator – weighted average common shares outstanding | |||||||||||||||||||||||
| Basic net income per common share | $ | $ | |||||||||||||||||||||
| Diluted net income per common share computation | |||||||||||||||||||||||
| Numerator – net income | $ | $ | |||||||||||||||||||||
| Denominator – weighted average common shares outstanding | |||||||||||||||||||||||
| Effect of dilutive stock options (1) | |||||||||||||||||||||||
| Weighted average common shares outstanding - assuming dilution | |||||||||||||||||||||||
| Diluted net income per common share | $ | $ | |||||||||||||||||||||
____________________________________________
(1) For the three months ended December 31, 2023 and 2022, average options to purchase 214,595 and 182,000 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share, because their effect would have been anti-dilutive.
29
(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the three months ended December 31, 2023 and 2022 are as follows (dollars in thousands):
| Three Months Ended December 31, 2023 | |||||||||||||||||
| Changes in fair value of available for sale securities (1) | Changes in OTTI on held to maturity securities (1) | Total (1) | |||||||||||||||
| Balance of AOCI at the beginning of period | $ | ( | $ | ( | $ | ( | |||||||||||
| Other comprehensive income | |||||||||||||||||
| Balance of AOCI at the end of period | $ | ( | $ | $ | ( | ||||||||||||
| Three Months Ended December 31, 2022 | |||||||||||||||||
| Changes in fair value of available for sale securities (1) | Changes in OTTI on held to maturity securities (1) | Total (1) | |||||||||||||||
| Balance of AOCI at the beginning of period | $ | ( | $ | ( | $ | ( | |||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||
| Balance of AOCI at the end of period | $ | ( | $ | ( | $ | ( | |||||||||||
__________________________
(1) All amounts are net of income taxes.
(8) STOCK COMPENSATION PLANS
Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees, including officers, and 50,000 shares are reserved to be awarded to directors and directors emeriti. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20 % annual installments on each of the anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of grant. At December 31, 2023, there were 7,816 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At December 31, 2023, there were 178,650 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan.
Stock option activity for the three months ended December 31, 2023 and 2022 is summarized as follows:
| Three Months Ended December 31, 2023 | Three Months Ended December 31, 2022 | ||||||||||||||||||||||
| Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||||||||||||||
| Options outstanding, beginning of period | $ | $ | |||||||||||||||||||||
| Exercised | ( | ( | |||||||||||||||||||||
| Forfeited | ( | ( | |||||||||||||||||||||
| Options outstanding, end of period | $ | $ | |||||||||||||||||||||
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The fair value of stock options is determined using the Black-Scholes valuation model.
There were no stock options granted during the three months ended December 31, 2023 and 2022.
The aggregate intrinsic value of options exercised during the three months ended December 31, 2023 and 2022 was $469,000 and $244,000 , respectively.
At December 31, 2023, there were 124,640 unvested options with an aggregate grant date fair value of $725,000 , all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at December 31, 2023 was $704,000 . There were 100 options that vested during the three months ended December 31, 2023 with a total fair value of $326 .
At December 31, 2022, there were 191,710 unvested options with an aggregate grant date fair value of $1.08 million. There were 200 options that vested during the three months ended December 31, 2022 with a total fair value of $652 .
Additional information regarding options outstanding at December 31, 2023 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||||||||||
| Range of Exercise Prices ($) | Number | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Number | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||||||||||||||
The aggregate intrinsic value of options outstanding at December 31, 2023 and 2022 was $2.22 million and $4.28 million, respectively.
As of December 31, 2023, unrecognized compensation cost related to unvested stock options was $711,000 , which is expected to be recognized over a weighted average life of 2.02 years.
At December 31, 2023, there were 26,150 unvested restricted stock awards. At December 31, 2022, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the three months ended December 31, 2023 and 2022.
| Time Based | ||||||||||||||
| Number of Unvested Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Outstanding, September 30, 2023 | $ | |||||||||||||
| Granted | ||||||||||||||
| Forfeited | ||||||||||||||
| Vested | ||||||||||||||
| Outstanding, December 31, 2023 | $ | |||||||||||||
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(9) FAIR VALUE MEASUREMENTS
Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability based on the best information available in the circumstances.
The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).
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The Company had no liabilities measured at fair value on a recurring basis at December 31, 2023 and September 30, 2023. The Company's assets measured at estimated fair value on a recurring basis at December 31, 2023 and September 30, 2023 were as follows (dollars in thousands):
| December 31, 2023 | Estimated Fair Value | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Available for sale investment securities | |||||||||||||||||||||||
| MBS: U.S. government agencies | $ | $ | $ | $ | |||||||||||||||||||
| Investments in equity securities | |||||||||||||||||||||||
| Mutual funds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| September 30, 2023 | Estimated Fair Value | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Available for sale investment securities | |||||||||||||||||||||||
| MBS: U.S. government agencies | $ | $ | $ | $ | |||||||||||||||||||
| Investments in equity securities | |||||||||||||||||||||||
| Mutual funds | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
There were no transfers among Level 1, Level 2 and Level 3 during the three months ended December 31, 2023 and the year ended September 30, 2023.
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.
The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:
Individually Evaluated Collateral-Dependent Loans: Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within level 3 of the fair value hierarchy.
Impaired Loans: Prior to the adoption of CECL, the estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of the comparable collateral included in the appraisal and known changes in the market and in the underlying collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
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The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at December 31, 2023 and September 30, 2023 (dollars in thousands):
| Estimated Fair Value | ||||||||||||||||||||
| December 31, 2023 | Level 1 | Level 2 | Level 3 | |||||||||||||||||
| Individually evaluated loans: | ||||||||||||||||||||
| Commercial business loans | $ | $ | $ | |||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Estimated Fair Value | |||||||||||||||||||||||
| September 30, 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Impaired loans: | |||||||||||||||||||||||
| Commercial business loans | $ | $ | $ | ||||||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||||||||
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of December 31, 2023 and September 30, 2023 (dollars in thousands):
| Valuation Technique(s) | Unobservable Input(s) | Range | |||||||||||||||||||||
| Individually evaluated and impaired loans | Market approach | Appraised value less estimated selling costs | N/A | ||||||||||||||||||||
GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a representative fair value for these types of items as of December 31, 2023 and September 30, 2023. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with GAAP, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
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The recorded amounts and estimated fair values of financial instruments were as follows as of December 31, 2023 and September 30, 2023 (dollars in thousands):
| December 31, 2023 | |||||||||||||||||||||||||||||
| Fair Value Measurements Using: | |||||||||||||||||||||||||||||
| Recorded Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| CDs held for investment | |||||||||||||||||||||||||||||
| Investment securities | |||||||||||||||||||||||||||||
| Investments in equity securities | |||||||||||||||||||||||||||||
| FHLB stock | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||||||||
| Loans receivable, net | |||||||||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||||||||
| FHLB borrowings | |||||||||||||||||||||||||||||
| Accrued interest payable | |||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||
| Fair Value Measurements Using: | |||||||||||||||||||||||||||||
| Recorded Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| CDs held for investment | |||||||||||||||||||||||||||||
| Investment securities | |||||||||||||||||||||||||||||
| Investments in equity securities | |||||||||||||||||||||||||||||
| FHLB stock | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||||||||
| Loans receivable, net | |||||||||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||||||||
| FHLB borrowings | |||||||||||||||||||||||||||||
| Accrued interest payable | |||||||||||||||||||||||||||||
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(10) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 required credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changed the accounting for PCI debt securities and loans. ASU 2016-13 retained many of the current disclosure requirements in GAAP and expanded certain disclosure requirements. As a "smaller reporting company" filer with the U.S. Securities and Exchange Commission, ASU 2016-13 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company experienced changes in the processes and procedures to calculate the allowance for credit losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the accounting practices that were utilized with the incurred loss model. In addition, the prior policy for OTTI on investment securities available for sale was replaced with an allowance approach. On October 1, 2023, the Company adopted this ASU, which resulted in a net of tax charge of $488,000 to retained earnings, a $461,000 increase to the allowance for credit losses on loans, a $92,000 increase to credit losses on investment securities, and a $65,000 increase to credit losses on unfunded commitments for the cumulative effect of adopting this guidance. For more information related to the implementation, see Note 4 Loans Receivable and Allowance for Credit Losses, Note 2 Investment Securities and Note 12 Commitment and Contingent Liabilities.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would then recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The adoption of ASU 2017-04 did not have a material impact on the Company's consolidated financial statements.
(11) REVENUE FROM CONTRACTS WITH CUSTOMERS
ASU 2014-09 Revenue from Contracts with Customers ("ASC 606") applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not within the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers withi n the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended December 31, 2023, the Company recognized $1.02 million in service charges on deposits, $1.26 million in ATM and debit card interchange transaction fees, $19,000 in escrow fees, and $2,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the three months ended December 31,
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2022, the Company recognized $947,000 in service charges on deposits, $1.25 million in ATM and debit card interchange transaction fees, $30,000 in escrow fees, and $30,000 in fee income from non-deposit investment sales.
If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue when it satisfies its performance obligation. Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:
•Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed, as the contract duration does not extend beyond the service performed.
•ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third-party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.
•Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property according to the customer's contract. Fees are recognized when the escrow contract closes.
•Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk not recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land and income-producing commercial properties.
A summary of the Company's commitments at December 31, 2023 and 2022 are listed below (in thousands):
| December 31, 2023 | December 31, 2022 | ||||||||||||||||
| Undisbursed portion of construction loans in process (see Note 4) | $ | ||||||||||||||||
| Undisbursed lines of credit | |||||||||||||||||
| Commitments to extend credit | |||||||||||||||||
| $ | $ | ||||||||||||||||
The Company maintains a separate allowance for credit losses related to unfunded loan commitments. The Company estimates expected losses on unfunded, off-balance sheet commitments over the contractual period in which the exposure to credit risk from a contractual obligation to extend credit, unless the Company has determined that obligation is unconditionally cancellable. The allowance methodology for calculating the ACL on unfunded loan commitments is similar to the methodology for calculating the ACL on loans but also includes an estimate of the future utilization of the commitment as determined by
37
historical commitment utilization. Credit risk associated with the unfunded commitments are consistent with the loss ratio for each loan segment within the allowance for credit losses for loans. The ACL for unfunded commitments is recognized in other liabilities and accrued expenses in the consolidated balance sheets and is adjusted as a provision (recapture of provision) for credit losses on the consolidated income statements. The ACL for unfunded loan commitments totaled $364,000 at December 31, 2023.
The following table sets forth information for the three months ended December 31, 2023 and 2022 regarding activity in the allowance for credit losses for unfunded loan commitments (dollars in thousands):
| Allowance for Credit Losses | December 31, 2023 | December 31, 2022 | ||||||||||||
| Beginning balance | $ | $ | ||||||||||||
| Impact of adopting CECL (ASU 2016-13) | ||||||||||||||
| (Recapture of) provision for credit losses | ( | |||||||||||||
| Ending allowance | $ | $ | ||||||||||||
The Bank has an employee severance compensation plan which expires in 2027 that provides for severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan). In general, all employees with or more years of service will be eligible to participate in the plan. Under the plan, in the event of a change in control of Timberland Bancorp or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service or officer rank with the Bank. The maximum payment for any eligible employee would be equal to 18 months of the employee’s current compensation.
Timberland Bancorp has entered into employment contracts with certain key employees, which provide for contingent payment subject to future events.
Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the future consolidated financial position of the Company.
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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q. The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three months ended December 31, 2023.
Special Note Regarding Forward-Looking Statements
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
38
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, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth; continuing elevated levels of inflation and the impact of current and future monetary policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") in response thereto; the effects of any federal government shutdown; credit risks of lending activities, including any deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio resulting in our ACL not being adequate to cover actual losses and thus requiring us to materially increase our ACL through the provision for credit losses; changes in general economic conditions, either nationally or in our market areas; 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; 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 Federal Reserve and of our bank subsidiary by the Federal Deposit Insurance Corporation (“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 credit 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; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; 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 in 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; the quality and composition of our securities portfolio and the impact if any adverse changes in the securities markets, including on market liquidity; 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 Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; 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 2023 Form 10-K.
Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this quarterly 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 2024 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.
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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 December 31, 2023, the Company had total assets of $1.90 billion, net loans receivable of $1.34 billion, total deposits of $1.63 billion and total shareholders’ equity of $237.37 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) credit 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.
Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, to a range of 5.25% to 5.50% as of December 31, 2023, taking benchmark borrowing costs to their highest level in more than 22 years.
The provision for (recapture of) credit 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 ACL on loans reflects the amount that management has determined is adequate to cover probable expected credit losses in the loan portfolio. As the loan portfolio increases, or due to an increase in probable expected losses inherent in the loan portfolio, the ACL may increase, resulting in a decrease to net interest income after the provision. Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to ACL on loans due to loan growth or an increase in the probable expected credit losses. The Company recorded a provision for credit losses on loans of $379,000 for the three months ended December 31, 2023 using the CECL methodology, primarily due to loan portfolio growth. The Company recorded a $525,000 provision for loan losses, using the prior incurred loss methodology, for the three months ended December 31, 2022.
Net income is also affected by non-interest income and non-interest expense. For the three months ended December 31, 2023, 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, escrow fees and other operating income. Non-interest income is also increased by net recoveries on investment securities and for periods prior to the adoption of CECL 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, 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.
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Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
The Company's critical accounting estimates are described in the Company’s 2023 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. Other than the adoption of CECL, there have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K.
Comparison of Financial Condition at December 31, 2023 and September 30, 2023
Total assets increased by $55.21 million, or 3.0%, to $1.90 billion at December 31, 2023 from $1.84 billion at September 30, 2023. The increase in total assets was primarily due to increases in loans receivable and total cash and cash equivalents, which was partially offset by decreases in investment securities and CDs held for investment. The quarterly increase in assets was primarily funded by an increase in deposits,which was partially offset by a decrease in FHLB borrowings.
Net loans receivable increased by $33.98 million, or 2.6%, to $1.34 billion at December 31, 2023 from $1.30 billion at September 30, 2023, primarily due to increases in multi-family loans, commercial real estate loans, one- to four-family loans as well as smaller increases in several other loan categories. These increases to net loans receivable were partially offset by decreases in construction and land development loans as well as decreases in several other loan categories.
Total deposits increased by $66.13 million, or 4.2%, to $1.63 billion at December 31, 2023 from $1.56 billion at September 30, 2023, primarily due to increases in money market account balances, certificates of deposit balances, and NOW checking account balances. These increases were partially offset by decreases in non-interest bearing deposit balances and savings account balances.
Shareholders’ equity increased by $4.30 million, or 1.8%, to $237.37 million at December 31, 2023 from $233.07 million at September 30, 2023. The increase in shareholders' equity was primarily due to net income and proceeds from stock options exercised and a reduction in accumulated other comprehensive loss during the current quarter. These increases were partially offset by the payment of dividends to common shareholders, a reduction of retained earnings related to adoption of the new CECL accounting standard and the repurchase of common stock during the quarter.
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 increased by $26.56 million, or 18.5%, to $170.47 million at December 31, 2023 from $143.91 million at September 30, 2023.
The increase was primarily due to increased deposits and a decrease in investment securities, which was partially offset by an increase in loans and a decrease in FHLB borrowings.
The increase was primarily due to increased deposits and a decrease in investment securities, which was partially offset by an increase in loans and a decrease in FHLB borrowings.
Investment Securities: Investment securities (including investments in equity securities) decreased by $5.42 million, or 1.7%, to $307.38 million at December 31, 2023 from $312.80 million at September 30, 2023. This decrease was primarily due to 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.”
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FHLB Stock: FHLB stock decreased $1.60 million, or 44.5% to $2.00 million at December 31, 2023 from $3.60 million at September 30, 2023, due to the repayment of a portion of FHLB borrowings and the restructuring of stock requirements by FHLB.
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 December 31, 2023 and September 30, 2023. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.
Loans: Net loans receivable increased by $33.98 million, or 2.6%, to $1.34 billion at December 31, 2023 from $1.30 billion at September 30, 2023. The increase was due to increases of $20.15 million in multi-family loans, $10.77 million in commercial real estate loans, $9.90 million in one- to four-family loans and smaller increases in other categories. These increases were partially offset by an $8.76 million decrease in construction and land development loans, and smaller decreases in several other loan categories.
Loan originations decreased by $12.74 million, or 12.5%, to $88.93 million for the three months ended December 31, 2023 from $101.67 million for the three months ended December 31, 2022. The decrease in loan originations was primarily due to a decrease in the amount of commercial real estate, one- to four-family and commercial business loans originated. The decrease was partially offset by increases in multi-family and consumer loan originations. The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four-family mortgage loans increased by $2.64 million, or 227.6%, to $3.8 million for the three months ended December 31, 2023 from $1.16 million for the three months ended December 31, 2022, primarily due to one- to four-family construction loans refinancing to permanent loans.
For additional information on loans, 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 $58,000, or 0.3%, to $21.58 million at December 31, 2023 from $21.64 million at September 30, 2023. This decrease was primarily due to scheduled depreciation.
OREO (Other Real Estate Owned): At December 31, 2023, total OREO and other repossessed assets consisted of one land parcel with no recorded value. At September 30, 2023, total OREO and other repossessed assets consisted of two land parcels with no recorded value.
BOLI (Bank Owned Life Insurance): BOLI increased by $156,000 or 0.7%, to $23.12 million at December 31, 2023 from $22.97 million at September 30, 2023. 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 December 31, 2023 and September 30, 2023. CDI decreased by $56,000, or 8.3%, to $621,000 at December 31, 2023 from $677,000 at September 30, 2023 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.”
Loan Servicing Rights, Net: Loan servicing rights, net decreased by $199,000 or 9.4%, to $1.92 million at December 31, 2023 from $2.12 million at September 30, 2023 primarily due to the amortization of servicing rights. The principal amount of loans serviced for Freddie Mac and SBA decreased by $3.25 million to $383.25 million at December 31, 2023 from $386.50 million at September 30, 2023.
Deposits: Deposits increased by $66.13 million, or 4.2%, to $1.63 billion at December 31, 2023 from $1.56 billion at September 30, 2023. The increase was primarily due to a $79.81 million increase in money market account balances, an $18.81 million increase in certificates of deposit balances and a $2.73 million increase in NOW checking account balances. These increases were partially offset by a $22.80 million decrease in non-interest bearing demand accounts and a $12.42 million decrease in savings account balances. The increase in money market account balances was primarily due to several larger balance increases with commercial customers.
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Deposits consisted of the following at December 31, 2023 and September 30, 2023 (dollars in thousands):
| December 31, 2023 | September 30, 2023 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| Non-interest-bearing demand | $ | 433,065 | 26.6 | % | $ | 455,864 | 29.2 | % | |||||||||||||||
| NOW checking | 389,463 | 23.9 | 386,730 | 24.8 | |||||||||||||||||||
| Savings | 215,948 | 13.3 | 228,366 | 14.6 | |||||||||||||||||||
| Money market | 269,686 | 16.6 | 189,875 | 12.2 | |||||||||||||||||||
| Certificates of deposit under $250 | 181,762 | 11.2 | 170,221 | 10.8 | |||||||||||||||||||
| Certificates of deposit $250 and over | 96,145 | 5.9 | 91,714 | 5.9 | |||||||||||||||||||
| Certificates of deposit - brokered | 41,000 | 2.5 | 38,165 | 2.5 | |||||||||||||||||||
| Total | $ | 1,627,069 | 100.0 | % | $ | 1,560,935 | 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. FHLB borrowings decreased to $20.00 million at December 31, 2023, from $35.00 million at September 30, 2023. The borrowings consist of one $5.00 million short-term borrowing, with a scheduled maturity in September 2024, that bears interest at 5.52%, and one $5.00 million borrowing and one $10.00 million borrowing with scheduled maturities in May 2026, both of which bear interest at 3.95%.
Shareholders’ Equity: Total shareholders’ equity increased by $4.30 million, or 1.8%, to $237.37 million at December 31, 2023 from $233.07 million at September 30, 2023. The increase was primarily due to net income of $6.30 million and proceeds of $355,000 from the exercise of stock options and a $257,000 reduction in the accumulated other comprehensive loss category for fair value adjustment on available for sale investment securities . This increase was partially offset by dividend payments to common shareholders of $1.87 million, a $488,000 adjustment to equity for the adoption of the new CECL accounting standard, and the repurchase of 12,330 shares of the Company's common stock for $362,000 during the current quarter.
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Asset Quality and Commercial Real Estate Portfolio Breakdown:
Non-performing assets to total assets was 0.18% at December 31, 2023 and 0.09% at September 30, 2023. Total non-performing assets increased by $1.86 million, or 116.2%, to $3.45 million at December 31, 2023 from $1.60 million at September 30, 2023. The increase in non-performing assets was due to a $1.85 million increase in non-accrual loans and a $3,000 increase in non-accrual investment securities.
The following table sets forth information with respect to the Company’s non-performing assets at December 31, 2023 and September 30, 2023 (dollars in thousands):
| December 31, 2023 | September 30, 2023 | ||||||||||
| Loans accounted for on a non-accrual basis: | |||||||||||
| Mortgage loans: | |||||||||||
| One- to four-family (1) | $ | 602 | $ | 368 | |||||||
| Commercial | 683 | 683 | |||||||||
| Construction – custom and owner/builder | 150 | — | |||||||||
| Consumer loans: | |||||||||||
| Home equity and second mortgage | 171 | 177 | |||||||||
| Commercial business loans | 1,760 | 286 | |||||||||
| Total loans accounted for on a non-accrual basis | 3,366 | 1,514 | |||||||||
| Accruing loans which are contractually past due 90 days or more | — | — | |||||||||
| Total of non-accrual and 90 days or more past due loans | 3,366 | 1,514 | |||||||||
| Non-accrual investment securities | 85 | 82 | |||||||||
| Total non-performing assets (2) | $ | 3,451 | $ | 1,596 | |||||||
| TDRs on accrual status (3) | $ | — | $ | 2,495 | |||||||
| Non-accrual and 90 days or more past due loans as a percentage of loans receivable | 0.25 | % | 0.11 | % | |||||||
| Non-accrual and 90 days or more past due loans as a percentage of total assets | 0.18 | % | 0.08 | % | |||||||
| Non-performing assets as a percentage of total assets | 0.18 | % | 0.09 | % | |||||||
| Loans receivable (4) | $ | 1,336,283 | $ | 1,318,122 | |||||||
| Total assets | $ | 1,895,115 | $ | 1,839,905 | |||||||
___________________________________
(1) As of December 31, 2023 and September 30, 2023, there were no one- to four-family properties in the process of foreclosure.
(2) Does not include TDRs on accrual status as of September 30, 2023. For more information regarding TDRs please see Note 4 of the Notes to Unaudited Financial Statements contained in "Item 1 Financial Statements".
(3) Does not include TDRs totaling $0 reported as non-accrual loans at September 30, 2023. For more information regarding TDRs please see Note 4 of the Notes to Unaudited Financial Statements contained in "Item 1 Financial Statements".
(4) Does not include loans held for sale, and loan balances are before the ACL.
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The following tables provide a breakdown of commercial real estate ("CRE") loans by collateral types as of December 31, 2023 and September 30, 2023:
| CRE Loan Portfolio Breakdown by Collateral at December 31, 2023 | ||||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Collateral Type | Balance | Percent of CRE Portfolio | Percent of Total Loan Portfolio | Average Balance per Loan | Non-Accrual | |||||||||||||||||||||||||||
| Industrial warehouse | $ | 114,355 | 20 | % | 8 | % | $ | 1,132 | $ | 195 | ||||||||||||||||||||||
| Medical/dental offices | 80,767 | 14 | 6 | % | 1,324 | — | ||||||||||||||||||||||||||
| Office buildings | 65,543 | 11 | 5 | % | 745 | — | ||||||||||||||||||||||||||
| Other retail buildings | 50,003 | 9 | 3 | % | 538 | — | ||||||||||||||||||||||||||
| Mini-storage | 37,131 | 6 | 2 | % | 1,375 | — | ||||||||||||||||||||||||||
| Hotel/motel | 31,973 | 5 | 2 | % | 2,906 | — | ||||||||||||||||||||||||||
| Restaurants | 27,346 | 5 | 2 | % | 558 | — | ||||||||||||||||||||||||||
| Gas stations/convenience stores | 21,346 | 4 | 1 | % | 970 | — | ||||||||||||||||||||||||||
| Nursing homes | 18,024 | 3 | 1 | % | 2,575 | — | ||||||||||||||||||||||||||
| Shopping centers | 10,922 | 2 | 1 | % | 1,820 | — | ||||||||||||||||||||||||||
| Mobile home parks | 10,917 | 2 | 1 | % | 520 | — | ||||||||||||||||||||||||||
| Churches | 7,121 | 1 | 1 | % | 475 | — | ||||||||||||||||||||||||||
| Other | 103,590 | 18 | 7 | % | 719 | 488 | ||||||||||||||||||||||||||
| Total CRE | $ | 579,038 | 100 | % | 40 | % | $ | 898 | $ | 683 | ||||||||||||||||||||||
| CRE Loan Portfolio Breakdown by Collateral at September 30, 2023 | ||||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Collateral Type | Balance | Percent of CRE Portfolio | Percent of Total Loan Portfolio | Average Balance per Loan | Non-Accrual | |||||||||||||||||||||||||||
| Industrial warehouse | $ | 115,804 | 20 | % | 8 | % | $ | 1,135 | $ | 195 | ||||||||||||||||||||||
| Medical/dental offices | 76,498 | 14 | 5 | % | 1,319 | — | ||||||||||||||||||||||||||
| Office buildings | 66,108 | 12 | 5 | % | 760 | — | ||||||||||||||||||||||||||
| Other retail buildings | 51,730 | 9 | 4 | % | 545 | — | ||||||||||||||||||||||||||
| Hotel/motel | 30,718 | 5 | 2 | % | 3,072 | — | ||||||||||||||||||||||||||
| Mini-storage | 27,750 | 5 | 2 | % | 1,156 | — | ||||||||||||||||||||||||||
| Restaurants | 27,640 | 5 | 2 | % | 564 | — | ||||||||||||||||||||||||||
| Gas stations/convenience stores | 21,588 | 4 | 1 | % | 939 | — | ||||||||||||||||||||||||||
| Nursing homes | 18,051 | 3 | 1 | % | 3,008 | — | ||||||||||||||||||||||||||
| Shopping centers | 10,790 | 2 | 1 | % | 2,158 | — | ||||||||||||||||||||||||||
| Mobile home parks | 9,696 | 2 | 1 | % | 510 | — | ||||||||||||||||||||||||||
| Churches | 7,253 | 1 | 1 | % | 484 | — | ||||||||||||||||||||||||||
| Other | 104,639 | 18 | 7 | % | 731 | 488 | ||||||||||||||||||||||||||
| Total CRE | $ | 568,265 | 100 | % | 40 | % | $ | 893 | $ | 683 | ||||||||||||||||||||||
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Comparison of Operating Results for the Three Months Ended December 31, 2023 and 2022
Net income decreased by $1.21 million, or 16.1%, to $6.30 million for the quarter ended December 31, 2023 from $7.51 million for the quarter ended December 31, 2022. Net income per diluted common share decreased by $0.13, or 14.4%, to $0.77 for the quarter ended December 31, 2023 from $0.90 for the quarter ended December 31, 2022. The decreases in net income and net income per diluted common share for the three months ended December 31, 2023 were primarily due to a $1.74 million decrease in net interest income and an $89,000 increase in non-interest expense.. This decrease was partially offset by a $93,000 increase in non-interest income, a $189,000 decrease in the provision for credit losses and a $335,000 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 decreased by $1.74 million, or 9.8%, to $16.00 million for the quarter ended December 31, 2023 from $17.74 million for the quarter ended December 31, 2022. This decrease was primarily due to an increase in the weighted average cost of interest-bearing liabilities to 2.22% at December 31, 2023 from 0.50% at December 31, 2022 and, to a lesser extent, a $67.35 million increase in average balance of total interest-bearing liabilities. Partially offsetting the increase in funding costs, was an increase in the average yields of interest-earning assets to 5.07% for the current quarter from 4.34% at December 31, 2022, and a $16.18 million increase in average total interest-bearing assets.
Total interest and dividend income increased by $3.38 million, or 17.7%, to $22.50 million for the quarter ended December 31, 2023 from $19.11 million for the quarter ended December 31, 2022, primarily due to increases in the average yield and average balance of loans receivable, and the average yields on interest-bearing deposits in banks and CDs and investment securities. These increases were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs.
The average balance of total interest-earning assets increased by $16.18 million, or 0.9%, to $1.78 billion for the quarter ended December 31, 2023 from $1.76 billion for the quarter ended December 31, 2022. The average balance of investment securities decreased by $13.19 million, or 4.1% and the average balance of loans receivable increased by $168.60 million, or 14.5%, which was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $140.19 million, or 52.6% between the periods. During the quarter ended December 31, 2023, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $10,000 compared to $28,000 for the quarter ended December 31, 2022. 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 December 31, 2023, there was a total of $142,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $120,000 collected for the quarter ended December 31, 2022. The average yield on interest-earning assets increased by 73 basis points to 5.07% for the quarter ended December 31, 2023 from 4.34% for the quarter ended December 31, 2022. The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 176 basis points and 22 basis points to 5.35% and 2.96%, respectively, for the quarter ended December 31, 2023 compared to the quarter ended December 31, 2022, while the average yield on loans receivable increased 55 basis points to 5.52% during the same period.
Total interest expense increased by $5.12 million, or 374.2%, to $6.49 million for the quarter ended December 31, 2023 from $1.37 million for the quarter ended December 31, 2022. The increase in interest expense was due to an increase in the average cost and, to a lesser extent, an increase in the average balance of interest-bearing liabilities, primarily deposits. The average cost of interest-bearing liabilities increased to 2.22% for the quarter ended December 31, 2023 from 0.50% for the quarter ended December 31, 2022. The average balance of interest-bearing liabilities increased by $67.35 million, or 6.2%, to $1.16 billion for the quarter ended December 31, 2023 from $1.09 billion for the quarter ended December 31, 2022, primarily due to decreases in the average balances of NOW checking, saving and money market accounts, partially offset by an increase in the average balance of certificate of deposit accounts and borrowings.
Interest expense on deposits increased by $4.77 million, or 348.7%, to $6.14 million for the quarter ended December 31, 2023 from $1.37 million for the quarter ended December 31, 2022, driven by an increase in the average cost of interest-bearing deposits in all categories and an increase in the average balance of certificates of deposit. The average cost of interest bearing deposits increased 113 basis points to 2.17% for the three months ended December 31, 2023, which included a 297 basis point increase in the cost of certificates of deposit to 4.16%, compared to the same period last year. The average balance of certificates of deposit increased $175.89 million, or 129.8%, to $311.35 million for the three months ended December 31, 2023, compared to the same period last year, which includes $42.73 million in brokered certificates of deposit.
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Interest expense on borrowing increased to $348,000 for the quarter ended December 31, 2023, compared to none for the quarter ended December 31, 2022. The average balance of borrowing was $28.80 million and the average rate paid on borrowings was 4.05% for the quarter ended December 31, 2023.
As a result of the increase in interest expense, the net interest margin ("NIM") decreased to 3.60% for the quarter ended December 31, 2023 from 4.03% for the quarter ended December 31, 2022.
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 December 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | ||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Loans receivable (1)(2) | $ | 1,332,971 | $ | 18,395 | 5.52 | % | $ | 1,164,369 | $ | 14,457 | 4.97 | % | |||||||||||||||||||||||
| Investment securities (2) | 310,183 | 2,311 | 2.96 | 323,368 | 2,214 | 2.74 | |||||||||||||||||||||||||||||
| Dividends from mutual funds, FHLB stock and other investments | 6,981 | 91 | 5.19 | 6,028 | 51 | 3.38 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in banks and CDs | 126,253 | 1,699 | 5.35 | 266,439 | 2,390 | 3.59 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 1,776,388 | 22,496 | 5.07 | 1,760,204 | 19,112 | 4.34 | |||||||||||||||||||||||||||||
| Non-interest-earning assets | 81,612 | 84,806 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,858,000 | $ | 1,845,010 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings | $ | 220,042 | 121 | 0.22 | $ | 279,832 | 82 | 0.12 | |||||||||||||||||||||||||||
| Money market | 224,939 | 1,329 | 2.34 | 239,424 | 321 | 0.53 | |||||||||||||||||||||||||||||
| NOW checking | 376,682 | 1,435 | 1.51 | 439,750 | 498 | 0.45 | |||||||||||||||||||||||||||||
| Certificates of deposit | 268,628 | 2,681 | 3.97 | 135,467 | 468 | 1.37 | |||||||||||||||||||||||||||||
| Brokered CDs | 42,725 | 578 | 5.38 | — | — | — | |||||||||||||||||||||||||||||
| Short-term borrowings | 13,804 | 195 | 5.62 | — | — | — | |||||||||||||||||||||||||||||
| Long-term borrowings | 15,000 | 153 | 4.06 | — | — | — | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,161,820 | 6,492 | 2.22 | 1,094,473 | 1,369 | 0.50 | |||||||||||||||||||||||||||||
| Non-interest-bearing deposits | 450,027 | 519,307 | |||||||||||||||||||||||||||||||||
| Other liabilities | 11,878 | 11,002 | |||||||||||||||||||||||||||||||||
| Total liabilities | 1,623,725 | 1,624,782 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 234,275 | 220,228 | |||||||||||||||||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||||||||||||||||
| shareholders' equity | $ | 1,858,000 | $ | 1,845,010 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 16,004 | $ | 17,743 | |||||||||||||||||||||||||||||||
| Interest rate spread | 2.85 | % | 3.84 | % | |||||||||||||||||||||||||||||||
| Net interest margin (3) | 3.60 | % | 4.03 | % | |||||||||||||||||||||||||||||||
| Ratio of average interest-earning assets to average interest- bearing liabilities | 152.90 | % | 160.83 | % | |||||||||||||||||||||||||||||||
47
_______________
(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 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 December 31, 2023 compared to three months ended December 31, 2022 increase (decrease) due to | |||||||||||||||||||||||||||||||||||
| Rate | Volume | Net Change | |||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Loans receivable and loans held for sale | $ | 1,714 | $ | 2,224 | $ | 3,938 | |||||||||||||||||||||||||||||
| Investment securities | 190 | (93) | 97 | ||||||||||||||||||||||||||||||||
| Dividends from mutual funds, FHLB stock and other investments | 31 | 9 | 40 | ||||||||||||||||||||||||||||||||
| Interest-bearing deposits in banks and CDs | 888 | (1,579) | (691) | ||||||||||||||||||||||||||||||||
| Total net increase in income on interest-earning assets | 2,823 | 561 | 3,384 | ||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings | 60 | (21) | 39 | ||||||||||||||||||||||||||||||||
| Money market | 1,028 | (20) | 1,008 | ||||||||||||||||||||||||||||||||
| NOW checking | 1,017 | (80) | 937 | ||||||||||||||||||||||||||||||||
| Certificates of deposit | 1,690 | 1,100 | 2,790 | ||||||||||||||||||||||||||||||||
| Short term FHLB borrowings | 97 | 98 | 195 | ||||||||||||||||||||||||||||||||
| Long-term borrowings | 76 | 77 | 153 | ||||||||||||||||||||||||||||||||
| Total net increase in expense on interest-bearing liabilities | 3,968 | 1,154 | 5,122 | ||||||||||||||||||||||||||||||||
| Net decrease in net interest income | $ | (1,145) | $ | (593) | $ | (1,738) | |||||||||||||||||||||||||||||
Provision for Credit Losses: A net $336,000 provision for credit losses was recorded for the quarter ended December 31, 2023, which consisted of a $379,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $10,000 recapture of credit losses on investment securities which is primarily due to maturities and principal payments, and a $33,000 recapture of credit losses on unfunded commitments which is primarily due to the change in mix of unfunded commitments. There was a $525,000 provision made for loan losses, under the prior incurred loan loss method, for the quarter ended December 31, 2022. The Company adopted the CECL methodology as of October 1, 2023, which resulted in one-time upward adjustments to the ACL on loans of $461,000, to the ACL on investment securities of $92,000, and to the ACL on unfunded commitments of $65,000, resulting in an after-tax decrease to opening retained earnings of $488,000. Amounts reported prior to October 1, 2023 were calculated using the previous incurred loss methodology to compute our allowance for credit losses, which is not directly comparable to the new CECL methodology. The provision for credit losses for the three months ended December 31, 2023 also reflects assumptions related to forecasts concerning the economic environment as a result of local, national and global events, including recent bank failures. In addition, expected loss estimates consider
48
various factors, including customer specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers ability to repay.
For the quarter ended December 31, 2023, net charge-offs were $2,000 compared to a $1,000 recovery for the quarter ended December 31, 2022. Non-accrual loans increased by $1.85 million, or 122.3%, to $3.36 million at December 31, 2023 from $1.51 million at September 30, 2023. At December 31, 2023, non-accrual loans increased by $1.32 million, or 64.7%, to $3.36 million from $2.04 million at December 31, 2022. Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $1.94 million, or 116.4%, to $3.60 million at December 31, 2023, from $1.67 million at September 30, 2023 and increased by $1.35 million, or 59.9%, from $2.25 million one year ago.
The $423,000 balance of SBA PPP loans was omitted from the Company's normal allowance for credit losses calculation at December 31, 2023, 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.
While management believes the estimates and assumptions used in the determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not have a material adverse impact on financial condition and results of operations. A further decline in national and local economic conditions, as a result of the effects of inflation, and a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL and have a material adverse impact on the financial condition and results of operations. In addition, the determination of the amount of the ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination and have a material adverse impact on the financial condition and results of operations.
In accordance with GAAP, acquired loans are recorded at their estimated fair value, which results 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. With the adoption of CECL, the loans are evaluated for impairment in the same manner as the rest of the loan portfolio. The remaining fair value discount associated with $11.2 million in loans that were acquired in the South Sound Acquisition was $182,000 at December 31, 2023. This discount will continue to accrete into income as these loans continue to pay down.
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 increased by $93,000, or 3.4%, to $2.80 million for the quarter ended December 31, 2023 from $2.71 million for the quarter ended December 31, 2022. This increase was primarily due to a $76,000 increase in service charges on deposits, a $57,000 increase in net gain on sales of loans, and smaller increases in several other categories. These increases were partially offset by small decreases in several other categories. The increase in net gain on sales of loans was primarily due to an increase in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter reflecting a slight increase in refinance activity compared to the same period last year. These increases were partially offset by small decreases in several other categories.
Non-interest Expense: Total non-interest expense increased by $89,000, or 0.8%, to $10.62 million for the quarter ended December 31, 2023 from $10.54 million for the quarter ended December 31, 2022. This increase was primarily due to increased expenses of $185,000 in technology and communications expense, $132,000 in ATM and debit card interchange expense, $86,000 in FDIC insurance and smaller increases in several other categories, which were partially offset by a $176,000 decrease in professional fees expense and smaller decreases in several categories. The increase in technology and communications expense was primarily due to the addition of several technology products and increased processing volumes. The increase in FDIC insurance was due to an increase in deposit insurance rates by the FDIC in January 2023. The efficiency ratio for the current quarter was 56.50% compared to 51.52% for the comparable quarter one year ago. The deterioration in the efficiency ratio was due to lower total revenue coupled with slightly higher non-interest expense.
Provision for Income Taxes: The provision for income taxes decreased by $335,000, or 17.8%, to $1.55 million for the quarter ended December 31, 2023 from $1.88 million for the quarter ended December 31, 2022. The decrease in the provision for income taxes was primarily due to lower pre-tax income. The Company's effective income tax rate was 19.6% for the quarter ended December 31, 2023 and 20.0% for the quarter ended December 31, 2022.
49
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 borrowings, if needed, from the FHLB and FRB. 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 December 31, 2023, 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 13.07%. At December 31, 2023, 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 $20.00 million was outstanding. The Bank had $576.42 million available for borrowings with the FHLB at December 31, 2023. The Bank maintains two short-term borrowing lines with the FRB with total credit based on eligible collateral: Borrower-in-Custody ("BIC") and Bank Term Funding Program ("BTFP"). At December 31, 2023, the Bank had no outstanding balance on the BIC line, under which $74.03 million was available for future borrowings. At December 31, 2023, the Bank had no outstanding balance on the BTFP line, under which $20.00 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At December 31, 2023, 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 three months ended December 31, 2023 and 2022, the Bank originated $88.93 million and $101.67 million of loans, respectively. At December 31, 2023, the Bank had loan commitments totaling $147.06 million and undisbursed construction loans in process totaling $104.68 million. Investment securities purchased during the three months ended December 31, 2023 and 2022 totaled $1.92 million and $31.31 million, respectively.
The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the three months ended December 31, 2023 and 2022, the Bank sold $9.60 million and $1.16 million, respectively, in loans and loan participation interests. During the three months ended December 31, 2023, the Bank received $44.35 million in principal repayments. During the three months ended December 31, 2022, the Bank received $50.71 million in principal repayments.
The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale (including equity securities) increased to $211.76 million at December 31, 2023 from $186.49 million at September 30, 2023. CDs that are scheduled to mature in less than one year from December 31, 2023 totaled $274.31 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 nine months ending September 30, 2024 that would materially impact liquidity.
50
For the remaining nine months in the year ending September 30, 2024, the Bank projects that fixed commitments will include $250,000 of operating lease payments. One FHLB borrowing totaling $5.00 million will mature during the fiscal year 2024. In addition, at December 31, 2023, there were other future obligations and accrued expenses of $8.88 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. In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At December 31, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.01 million.
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 $0.24 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 2024 at the rate of $0.24 per share, the average total dividend paid each quarter would be approximately $1.95 million based on the number of current outstanding shares at December 31, 2023 (which assumes no increases or decrease in the number of shares).
In addition, from time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On July 25, 2023, the Company announced the adoption of a new stock repurchase program pursuant to which the Company may repurchase up to 404,708 shares of Company common stock, of which 361,812 shares remained available for future purchases as of December 31, 2023. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.
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 December 31, 2023, the Bank exceeded all regulatory capital requirements. 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 December 31, 2023, 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.
51
The following table compares the Bank’s actual capital amounts at December 31, 2023 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 | $222,238 | 12.06 | % | $73,718 | 4.00 | % | $92,147 | 5.00 | % | ||||||||||||||||||||||||||
| Risk-based Capital Ratios: | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | 222,238 | 18.10 | 55,247 | 4.50 | 79,801 | 6.50 | |||||||||||||||||||||||||||||
| Tier 1 capital | 222,238 | 18.10 | 73,662 | 6.00 | 98,216 | 8.00 | |||||||||||||||||||||||||||||
| Total capital | 237,606 | 19.35 | 98,216 | 8.00 | 122,770 | 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 December 31, 2023, 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 December 31, 2023, 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 December 31, 2023 (dollars in thousands):
| Actual | |||||||||||
| Amount | Ratio | ||||||||||
| Leverage Capital Ratio: | |||||||||||
| Tier 1 capital | $223,774 | 12.14 | % | ||||||||
| Risk-based Capital Ratios: | |||||||||||
| Common equity Tier 1 capital | 223,774 | 18.22 | |||||||||
| Tier 1 capital | 223,774 | 18.22 | |||||||||
| Total capital | 239,147 | 19.47 | |||||||||
Key Financial Ratios and Data
| Three Months Ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
PERFORMANCE RATIOS: | |||||||||||||||||||||||
| Return on average assets | 1.36 | % | 1.63 | % | |||||||||||||||||||
| Return on average equity | 10.75 | % | 13.63 | % | |||||||||||||||||||
| Net interest margin | 3.60 | % | 4.03 | % | |||||||||||||||||||
| Efficiency ratio | 56.50 | % | 51.52 | % | |||||||||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information concerning market risk from the information provided in the Company’s 2023 Form 10-K.
52
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer) and several other members of the Company’s senior management as of the end of the period covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2023, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b)Changes in Internal Controls: The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 4 to the consolidated interim financial statements, effective October 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There were no other changes in the Company's internal control over financial reporting during the three months ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company continued, however, to implement suggestions from its internal auditor and independent auditors to strengthen existing controls. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; as over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is a party to any material legal proceedings at this time. From time to time,
the Bank is involved in various claims and legal actions arising in the ordinary course of business.
Item 1A. Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Stock Repurchases
53
The following table sets forth the shares repurchased by the Company during the quarter ended December 31, 2023:
| Period | Total No. of Shares Repurchased | Average Price Paid Per Share | Total No. of Shares Purchased as Part of Publicly Announced Plan | Maximum No. of Shares that May Yet Be Purchased Under the Plan (1) | ||||||||||||||||||||||
| 10/1/2023 - 10/31/2023 | — | $ | — | — | 374,142 | |||||||||||||||||||||
| 11/1/2023 - 11/30/2023 | 12,330 | 29.38 | 12,330 | 361,812 | ||||||||||||||||||||||
| 12/1/2023 - 12/31/2023 | — | — | — | 361,812 | ||||||||||||||||||||||
| Total | 12,330 | $ | 29.38 | 12,330 | 361,812 | |||||||||||||||||||||
(1) On July 25, 2023, the Company announced a new stock repurchase program to purchase 404,708 shares of the Company's common stock. This marked the Company's 19th stock repurchase plan. The new repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions based upon market conditions and available liquidity. Cumulatively, since January 1998, the Company has repurchased 8,379,317 shares of its common stock at an average price of $9.98 per share.
The Company is subject to certain restrictions on its ability to repurchase its common stock. The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
a.None to be reported.
b.None to be reported.
c.During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement
54
Item 6. Exhibits
(a) Exhibits
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 10.10 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101 | The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended December 31, 2023 formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Consolidated Financial Statements | |||||||
| 104 | Cover Page Interactive Data File, formatted in Inline XBRL and included in Exhibit 101 | |||||||
_________________
(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).
(2)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 13, 2023.
(3)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.
(4)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(5)Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).
(6)Incorporated by reference to Registrant's Current Report on Form 8-K filed on December 22, 2023.
(7)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.
(8)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Timberland Bancorp, Inc. | |||||
| Date: February 12, 2024 | By: /s/ Dean J. Brydon | ||||
| Dean J. Brydon | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| | |||||
| Date: February 12, 2024 | By: /s/Marci A. Basich | ||||
| Marci A. Basich | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
56
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act
I, Dean J. Brydon, certify that:
1.I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 12, 2024
| /s/ Dean J. Brydon | ||||||||
| Dean J. Brydon | ||||||||
| Chief Executive Officer | ||||||||
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act
I, Marci A. Basich, certify that:
1.I have reviewed this Form 10-Q of Timberland Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 12, 2024
| /s/ Marci A. Basich | ||||||||
| Marci A. Basich | ||||||||
| Chief Financial Officer | ||||||||
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF TIMBERLAND BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), each of the undersigned hereby certifies in his capacity as an officer of Timberland Bancorp, Inc. (the “Company”) and in connection with the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2023 (“Report”), that:
•the Report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and
•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in the Report.
| /s/ Dean J. Brydon | /s/ Marci A. Basich | ||||||||||
| Dean J. Brydon | Marci A. Basich | ||||||||||
| Chief Executive Officer | Chief Financial Officer | ||||||||||
Date: February 12, 2024