Timberland Bancorp(TSBK) - 2021 Q4 - Annual Report

Part I Business Timberland Bancorp, Inc. is the holding company for Timberland Bank, a community-oriented bank founded in 1915, with total assets of $1.79 billion as of September 30, 2021, operating 24 branches across six Washington State counties and focusing on real estate mortgage loans and deposit services - Key Financials at September 30, 2021 | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $1.79 | | Net Loans Receivable | $0.97 | | Total Deposits | $1.57 | | Total Shareholders' Equity | $0.21 | - The Bank's primary market areas are Grays Harbor, Pierce, Thurston, King, Kitsap, and Lewis counties in Washington, with 24 branches serving these communities[13][16] - Lending activities are concentrated in real estate, with a focus on residential and commercial/multi-family construction loans, one- to four-family residential loans, multi-family loans, and commercial real estate loans[14] General Overview Timberland Bancorp, Inc. was established in 1997 as the holding company for Timberland Bank, founded in 1915, and completed the acquisition of South Sound Bank in 2018 - Timberland Bancorp, Inc. was organized in 1997 as the holding company for Timberland Bank, which was established in 1915[12][13] - The company completed the acquisition of South Sound Bank on October 1, 2018, merging it into Timberland Bank and integrating its operations[14] Market Area The Bank primarily serves six counties in Washington, strategically expanding beyond Grays Harbor to diversify its economic base - The Bank's primary market area includes six counties in Washington: Grays Harbor, Pierce, Thurston, Kitsap, King, and Lewis[16] - The company has strategically expanded into Pierce, Thurston, Kitsap, King, and Lewis counties to diversify its market and reduce reliance on the Grays Harbor County economy, which has historically depended on the timber and fishing industries[18] - Unemployment Rate Improvement (Year Ended Sep 30, 2021) | County | Sep 30, 2020 | Sep 30, 2021 | | :--- | :--- | :--- | | Grays Harbor | 10.0% | 5.3% | | Pierce | 8.6% | 4.2% | | Thurston | 7.1% | 3.5% | | Kitsap | 6.8% | 3.4% | | King | 7.0% | 4.3% | | Lewis | 8.1% | 4.3% | Lending Activities The Bank's lending portfolio is primarily concentrated in real estate mortgage loans, including commercial, construction, and residential, alongside commercial business and consumer loans - Loan Portfolio Composition (September 30, 2021) | Loan Category | Amount (Millions) | % of Total Loans | | :--- | :--- | :--- | | Commercial Real Estate | $470.65 | 43.5% | | Construction (All types) | $233.21 | 21.5% | | One- to Four-Family | $119.94 | 11.1% | | Commercial Business & SBA PPP | $115.50 | 10.7% | | Multi-Family | $87.56 | 8.1% | | Consumer | $35.50 | 3.3% | | Land | $19.94 | 1.8% | - Total gross loan originations were $602.34 million for the year ended September 30, 2021, a slight increase from $597.19 million in the prior year[70] - Non-performing assets decreased to $3.17 million (0.18% of total assets) at FYE 2021 from $4.16 million (0.27% of total assets) at FYE 2020[82] - The allowance for loan losses was $13.47 million at FYE 2021, representing 1.37% of total loans receivable (excluding fully guaranteed SBA PPP loans)[99][104] Investment Activities The company's investment portfolio significantly increased, primarily composed of mortgage-backed securities and U.S. Government Agency securities - The total investment portfolio increased to $132.28 million at September 30, 2021, from $85.80 million at the prior year-end[107] - Investment Portfolio Composition (September 30, 2021) | Security Type | Amount (Millions) | % of Total | | :--- | :--- | :--- | | Mortgage-Backed Securities (Available for Sale) | $63.18 | 47.8% | | Mortgage-Backed Securities (Held to Maturity) | $39.84 | 30.1% | | U.S. Government Agency Securities | $28.76 | 21.7% | | Bank Issued Trust Preferred Securities | $0.50 | 0.4% | Deposit Activities and Other Sources of Funds Total deposits significantly increased, with non-interest bearing demand and NOW checking accounts forming the largest components of the deposit base - Total deposits increased by $212.15 million (15.6%) to $1.57 billion at September 30, 2021, from $1.36 billion a year prior[114][330] - Deposit Composition (September 30, 2021) | Deposit Type | Amount (Millions) | % of Total Deposits | | :--- | :--- | :--- | | Non-interest bearing demand | $535.21 | 34.1% | | NOW checking | $430.10 | 27.4% | | Savings | $260.69 | 16.6% | | Money market | $210.43 | 13.4% | | Certificates of Deposit | $134.13 | 8.5% | - The Bank utilizes borrowings from the Federal Home Loan Bank (FHLB) to supplement funds, with $5.0 million in FHLB borrowings outstanding as of September 30, 2021[115][116] Regulation Timberland Bancorp and Timberland Bank are regulated by the Federal Reserve, DFI, and FDIC, consistently meeting "well capitalized" requirements - Timberland Bancorp, Inc. is regulated as a bank holding company by the Federal Reserve, while Timberland Bank is a state-chartered savings bank regulated by the Washington Department of Financial Institutions (DFI) and the Federal Deposit Insurance Corporation (FDIC)[118][119] - As of September 30, 2021, the Bank met all requirements to be considered "well capitalized" under prompt corrective action regulations, exceeding all minimum capital ratios[129][130][136] - Bank Capital Ratios (September 30, 2021) | Capital Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | CET1 Capital Ratio | 20.6% | 6.5% | | Tier 1 Capital Ratio | 20.6% | 8.0% | | Total Capital Ratio | 21.8% | 10.0% | | Tier 1 Leverage Ratio | 10.7% | 5.0% | Employees and Human Capital Resources As of September 30, 2021, the company employed 288 individuals with an average tenure of 8.1 years, with women comprising 80% of the workforce and 76% of management roles - As of September 30, 2021, the Company had 276 full-time and 12 part-time employees, with an average employee tenure of 8.1 years[174] - The workforce was 80% female, and women held 76% of the Bank's management roles[174] Risk Factors The company identifies several key risks, with the most significant being related to the COVID-19 pandemic's economic impact, general economic downturns, and specific risks within its lending activities - The COVID-19 pandemic is cited as a primary risk, potentially impacting business conduct, financial results, and customer credit quality through unemployment and business insolvency[188][194] - Real estate construction and land loans, which represent 21.5% and 1.8% of the total loan portfolio respectively, expose the company to significant risks due to the uncertainties of project costs, completion values, and market demand[208] - The concentration in commercial real estate lending (43.5% of total loans) subjects the company to additional regulatory scrutiny and increased risk from economic downturns affecting property income streams[210][211][213] - Changes in market interest rates pose a significant risk to net interest income, the value of investment securities, and the ability of borrowers with adjustable-rate loans to make payments[224][225] Properties As of September 30, 2021, the Bank operated from 24 full-service facilities, with the majority owned and three leased, and also operates 25 proprietary ATMs - The Bank operates 24 full-service facilities, of which 21 are owned and 3 are leased[265] - The company adopted ASC 842 on October 1, 2019, recording operating lease right-of-use (ROU) assets and liabilities for its three leased branch offices[270] Legal Proceedings The company is periodically involved in various claims and lawsuits incidental to its business but is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition or operations - The Company is not currently a party to any legal proceedings expected to have a material adverse effect on its financial condition or operations[271] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Market under "TSBK", has declared quarterly cash dividends for 36 consecutive quarters, and announced an 18th stock repurchase plan in February 2021 to repurchase 415,970 shares - The company's common stock is traded on the Nasdaq Global Market under the symbol "TSBK"[274] - A stock repurchase plan for 415,970 shares was announced on February 24, 2021, with 16,688 shares repurchased under this plan at an average price of $28.08 per share as of September 30, 2021[276] - The Board has declared quarterly cash dividends for 36 consecutive quarters, with future dividends dependent on capital requirements, financial condition, and regulatory limitations[274] Management's Discussion and Analysis of Financial Condition and Results of Operations For the fiscal year ended September 30, 2021, net income increased 13.7% to $27.58 million, primarily due to a $3.70 million decrease in the provision for loan losses, while total assets grew 14.4% to $1.79 billion, funded by a 15.6% increase in deposits, and net interest margin compressed by 65 basis points to 3.25% - Financial Performance Comparison (FY 2021 vs. FY 2020) | Metric | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net Income | $27.58M | $24.27M | | Diluted EPS | $3.27 | $2.88 | | Net Interest Income | $51.86M | $50.88M | | Provision for Loan Losses | $0 | $3.70M | | Non-interest Income | $17.16M | $17.19M | | Non-interest Expense | $34.59M | $34.06M | - Total assets increased by 14.4% to $1.79 billion at FYE 2021, primarily driven by a $212.15 million (15.6%) increase in total deposits[328][330] - The net interest margin decreased by 65 basis points to 3.25% for FY 2021 from 3.90% in FY 2020, impacted by the low-rate environment and a significant increase in lower-yielding cash balances[354] Critical Accounting Policies and Estimates Management identifies six critical accounting policies, with the allowance for loan losses being highly subjective due to reliance on economic estimates and collateral valuations - Management identifies six critical accounting policies requiring significant judgment and estimates: allowance for loan losses, other-than-temporary impairment (OTTI) of investment securities, valuation of loan servicing rights, valuation of OREO, valuation of assets/liabilities in acquisitions, and goodwill impairment[305] - The determination of the allowance for loan losses is highly subjective, involving estimates of economic conditions, collateral values, and loss factors, with a methodology including specific allowances for impaired loans and a general allowance based on historical experience and qualitative factors[307][308] Comparison of Financial Condition (FY 2021 vs. FY 2020) Total assets increased significantly, primarily funded by deposit growth, while net loans decreased due to SBA PPP loan forgiveness - Balance Sheet Changes (YoY) | Account | Sep 30, 2021 | Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $1.79B | $1.57B | +14.4% | | Cash & Equivalents | $580.20M | $314.45M | +84.5% | | Net Loans Receivable | $968.45M | $1.01B | -4.5% | | Total Deposits | $1.57B | $1.36B | +15.6% | | Shareholders' Equity | $206.90M | $187.63M | +10.3% | - The decrease in net loans was primarily due to an $85.90 million reduction in SBA PPP loans as they were forgiven by the SBA[337] Comparison of Operating Results (FY 2021 vs. FY 2020) Net income increased due to a lower provision for loan losses, while net interest income saw a modest rise despite net interest margin compression - Net income increased by $3.31 million (13.7%) YoY, primarily due to a $3.70 million decrease in the provision for loan losses[345] - Net interest income increased by $976,000 (1.9%) YoY, as a higher average balance of interest-earning assets and lower deposit costs were partially offset by a lower average yield on assets[347] - Non-interest income remained stable at $17.16 million, while non-interest expense increased slightly by 1.6% to $34.59 million, driven by higher salaries and data processing costs[360][362] Financial Statements and Supplementary Data The consolidated financial statements present the financial position, results of operations, and cash flows for the three years ended September 30, 2021, audited by Delap LLP with an unqualified opinion, and include notes detailing significant accounting policies and capital compliance - The independent registered public accounting firm, Delap LLP, issued an unqualified opinion on the consolidated financial statements[391] - The critical audit matter identified was the Allowance for Loan Losses (ALL), specifically the subjective and complex judgments involved in determining the qualitative risk factors used in the general component of the allowance[396][400] - Consolidated Statement of Income Highlights (Year Ended Sep 30) | (In thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Interest Income | $51,858 | $50,882 | $51,160 | | Provision for Loan Losses | $0 | $3,700 | $0 | | Non-interest Income | $17,161 | $17,188 | $14,341 | | Non-interest Expense | $34,591 | $34,063 | $35,580 | | Net Income | $27,583 | $24,269 | $24,020 | Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the fourth quarter - The CEO and CFO concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective[641] - Management's assessment concluded that the company's internal control over financial reporting was effective as of September 30, 2021[648]