Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.
The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2021.
Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the effect of the COVID-19 pandemic, including on the Company's credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III; the impact of the Dodd Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; 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; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; including as a result of the CARES Act and the CAA 2021; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including as a result of the CAA 2021 and recent COVID-19 vaccination and economic stimulus efforts; 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 2020 Form 10-K.
Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management’s beliefs and assumptions at the time that they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal year 2021 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance.
Overview
Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 offices (including its main office in Hoquiam). At March 31, 2021, the Company had total assets of $1.70 billion, net loans receivable of $1.03 billion, total deposits of $1.48 billion and total shareholders’ equity of $198.54 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 consolidated financial statements and related data, relates primarily to the Bank's operations.
The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans.
The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities. Management attempts to maintain a net interest margin placing it within the top quartile of its Washington State peers. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the 150 basis point reductions in the targeted federal funds rate in March 2020, until the pandemic subsides, the Company expects that its net interest income and net interest margin will be adversely affected.
The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio. The Company did not record a provision for loan losses for the six months ended March 31, 2021, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during this period. The Company recorded a provision for loan losses of $2.00 million for the three months ended March 31, 2020 and $3.70 million for the year ended September 30,
2020. The provisions recorded during the last nine months of the year ended September 30, 2020 were primarily due to forecasted probable loan losses reflecting the potential future impact of the COVID-19 pandemic on the economy.
The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of the COVID-19 pandemic. The Company remains focused on keeping its employees safe and the Bank running effectively to serve its customers. The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and public health authority guidelines. To help ensure the safety of the Company's customers and employees, services are offered primarily through drive up facilities and/or by appointment. Some of the Company's employees are working remotely or have flexible work schedules, and protective measures within the Company's offices have been established to help ensure the safety of those employees who must work on-site.
The Company has worked with loan customers on loan deferral and forbearance plans. In response to requests from borrowers, the Company made payment deferral modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. The majority of these borrowers had resumed making payments as of March 31, 2021, and only eight loans with balances totaling $12.88 million remained on deferral status as of that date. Borrowers were paying interest monthly on five of these eight deferred loans totaling $8.46 million. These modifications were not classified as TDRs at March 31, 2021 in accordance with the guidance of the CARES Act and related regulatory guidance. The Company is continuing to work on forbearance plans with customers impacted by the COVID-19 pandemic. The CARES Act also authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program ("PPP"). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans in April 2020 and originated $127.54 million in PPP loans through the program's initial conclusion in August 2020. The CAA 2021, which was signed into law on December 27, 2020, renews and extends the PPP until May 31, 2021. As a result, the Company began originating PPP loans again in January 2021. As of March 31, 2021, the Company had $138.18 million in PPP loans to new and existing customers who are small to midsize businesses as well as non-profit organizations, independent contractors, and partnerships as allowed under PPP guidance.
Net income is also affected by non-interest income and non-interest expense. For the three and six months ended March 31, 2021, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income. Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on servicing rights and increased by recoveries of valuation allowances on servicing rights, if any. Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses. Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.
Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Critical Accounting Policies and Estimates
The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company’s 2020 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2020 Form 10-K.
Comparison of Financial Condition at March 31, 2021 and September 30, 2020
The Company’s total assets increased by $133.27 million, or 8.5%, to $1.699 billion at March 31, 2021 from $1.566 billion at September 30, 2020. The increase in total assets was primarily due to increased cash and cash equivalents, and to a much lesser
extent, increases in investment securities, and net loans receivable, partially offset by a decrease in CDs held for investment. The increase in total assets was funded primarily by an increase in total deposits.
Net loans receivable increased by $16.81 million, or 1.7%, to $1.031 billion at March 31, 2021 from $1.014 billion at September 30, 2020, primarily due to an increase in SBA PPP loans and smaller increases in several other categories. These increases were partially offset by decreases in construction loans, land loans, and smaller decreases in several other categories.
Total deposits increased by $123.45 million, or 9.1%, to $1.482 billion at March 31, 2021 from $1.358 billion at September 30, 2020, primarily due to increases in non-interest-bearing demand account balances, savings account balances, NOW checking account balances, and money market account balances. These increases were partially offset by a decrease in certificates of deposit account balances.
Shareholders’ equity increased by $10.91 million, or 5.8%, to $198.54 million at March 31, 2021 from $187.63 million at September 30, 2020. The increase in shareholders' equity was primarily due to net income, partially offset by the payment of dividends to common shareholders.
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 $93.02 million, or 24.5%, to $473.02 million at March 31, 2021 from $380.00 million at September 30, 2020. The increase was primarily a result of an increase in total deposits, which exceeded the funds required for loan originations and used for purchases of investment securities.
Investment Securities: Investment securities (including investments in equity securities) increased by $19.84 million, or 22.9%, to $106.61 million at March 31, 2021 from $86.77 million at September 30, 2020. This increase was primarily due to the purchase of additional mortgage-backed investment securities and U.S. Treasury securities during the six months ended March 31, 2021 as the Company put a portion of its excess overnight liquidity into higher-earning investment securities during the period. These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”
FHLB Stock: FHLB stock increased $381,000, or 19.8% to $2.30 million at March 31, 2021 from $1.92 million at September 30, 2020, due to purchases required by the FHLB due to the increase in total assets.
Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both March 31, 2021 and September 30, 2020. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.
Loans: Net loans receivable increased by $16.81 million, or 1.7%, to $1.031 billion at March 31, 2021 from $1.014 billion at September 30, 2020. The increase was primarily due to an $11.36 million increase in SBA PPP loans, a $10.01 million decrease in the undisbursed portion of construction loans in process, an $8.39 million increase in commercial real estate mortgage loans, and a $7.38 million increase in multi-family mortgage loans. These increases to net loans receivable were partially offset by an $8.06 million decrease in construction loans, a $6.52 million decrease in land loans, and smaller decreases in several other loan categories. The SBA PPP loan balances increased primarily due to the renewal of the program in December 2020 and was partially offset by borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA.
Loan originations increased by $90.69 million, or 38.9%, to $323.72 million for the six months ended March 31, 2021 from $233.03 million for the six months ended March 31, 2020. The increase in loan originations was primarily due to funding new SBA PPP loans, increased loan demand for one- to four-family mortgage loan refinances, and the funding of several larger commercial business and commercial real estate loans. The Company continued to sell longer-term fixed rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. The Company also periodically sells the guaranteed portion of SBA loans. Sales of fixed rate one- to four-family mortgage loans increased by $23.07 million, or 37.2%, to $85.13 million for the six months ended March 31, 2021 from $62.06 million for the six months ended March 31, 2020, primarily due to increased refinance activity for one- to four-family loan due to the decrease in mortgage interest rates.
For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”
Premises and Equipment: Premises and equipment decreased by $272,000, or 1.2%, to $22.76 million at March 31, 2021 from $23.04 million at September 30, 2020. This decrease was primarily due to normal depreciation.
OREO (Other Real Estate Owned): OREO and other repossessed assets decreased by $893,000, or 85.0%, to $157,000 at March 31, 2021 from $1.05 million at September 30, 2020, primarily due to the sale of three land parcels. At March 31, 2021, total OREO and other repossessed assets consisted of three land parcels totaling $157,000.
BOLI (Bank Owned Life Insurance): BOLI increased by $295,000 or 1.4%. to $21.89 million at March 31, 2021 from $21.60 million at September 30, 2020. 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 March 31, 2021 and September 30, 2020. CDI decreased by $181,000, or 11.1%, to $1.44 million at March 31, 2021 from $1.63 million at September 30, 2020 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”
Deposits: Deposits increased by $123.45 million, or 9.1%, to $1.482 billion at March 31, 2021 from $1.358 billion at September 30, 2020. The increase in total deposits was primarily due to a $57.65 million increase in non-interest bearing demand account balances, a $30.87 million increase in savings account balances, a $26.91 million increase in NOW checking account balances, and a $23.77 million increase in money market account balances. These increases were partially offset by a $15.74 million decrease in certificates of deposit account balances.
Deposits consisted of the following at March 31, 2021 and September 30, 2020 (dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
September 30, 2020
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Non-interest-bearing demand
|
$
|
499,541
|
|
|
33.7
|
%
|
|
$
|
441,889
|
|
|
32.5
|
%
|
NOW checking
|
403,811
|
|
|
27.2
|
|
|
376,899
|
|
|
27.8
|
|
Savings
|
250,736
|
|
|
16.9
|
|
|
219,869
|
|
|
16.2
|
|
Money market
|
171,896
|
|
|
11.6
|
|
|
149,922
|
|
|
11.0
|
|
Money market - reciprocal
|
13,094
|
|
|
0.9
|
|
|
11,303
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|
|
0.9
|
|
Certificates of deposit under $250
|
119,388
|
|
|
8.1
|
|
|
129,579
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|
|
9.5
|
|
Certificates of deposit $250 and over
|
23,393
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|
|
1.6
|
|
|
28,945
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
Total
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$
|
1,481,859
|
|
|
100.0
|
%
|
|
$
|
1,358,406
|
|
|
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 remained unchanged at $10.00 million at both March 31, 2021 and September 30, 2020, and consisted of two $5.00 million borrowings, with scheduled maturities in March 2025 and March 2027, respectively, and which bear interest at 1.19% and 1.11%, respectively.
Shareholders’ Equity: Total shareholders’ equity increased by $10.91 million, or 5.8%, to $198.54 million at March 31, 2021 from $187.63 million at September 30, 2020. The increase was primarily due to net income of $14.54 million for the six months ended March 31, 2021 and $519,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $4.24 million and the repurchase of 2,900 shares of the Company's common stock for $58,000 (an average price of $20.04 per share). During the quarter ended March 31, 2021, the Company adopted a new stock repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares, or 415,970 shares. The new stock repurchase program replaces the existing stock repurchase program, which had 141,952 shares available to be repurchased. For additional information, see Item 2 of Part II of this Form 10-Q.
Asset Quality: The non-performing assets to total assets ratio was 0.16% at March 31, 2021 compared to 0.27% at September 30, 2020. Total non-performing assets decreased by $1.51 million, or 36.4%, to $2.65 million at March 31, 2021 from $4.16 million at September 30, 2020. The decrease in non-performing assets was due to an $893,000 decrease in OREO and other repossessed assets, a $600,000 decrease in non-accrual loans, and a $21,000 decrease in non-accrual investment securities.
The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2021 and September 30, 2020 (dollars in thousands):
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|
|
March 31,
2021
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|
September 30,
2020
|
Loans accounted for on a non-accrual basis:
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|
|
Mortgage loans:
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|
|
One- to four-family (1)
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$
|
415
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|
|
$
|
659
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|
|
Commercial
|
643
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|
|
858
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|
|
|
|
|
|
|
|
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Land
|
173
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|
|
394
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|
Consumer loans:
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|
|
|
Home equity and second mortgage
|
539
|
|
|
564
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|
Other
|
8
|
|
|
—
|
|
Commercial business loans
|
527
|
|
|
430
|
|
Total loans accounted for on a non-accrual basis
|
2,305
|
|
|
2,905
|
|
|
|
|
|
Accruing loans which are contractually past due 90 days or more
|
—
|
|
|
—
|
|
|
|
|
|
Total of non-accrual and 90 days past due loans
|
2,305
|
|
|
2,905
|
|
|
|
|
|
Non-accrual investment securities
|
188
|
|
|
209
|
|
|
|
|
|
OREO and other repossessed assets, net (2)
|
157
|
|
|
1,050
|
|
Total non-performing assets (3)
|
$
|
2,650
|
|
|
$
|
4,164
|
|
|
|
|
|
TDRs on accrual status (4)
|
$
|
2,864
|
|
|
$
|
2,868
|
|
|
|
|
|
Non-accrual and 90 days or more past due loans as a percentage of loans receivable
|
0.22
|
%
|
|
0.28
|
%
|
|
|
|
|
Non-accrual and 90 days or more past due loans as a percentage of total assets
|
0.14
|
%
|
|
0.19
|
%
|
|
|
|
|
Non-performing assets as a percentage of total assets
|
0.16
|
%
|
|
0.27
|
%
|
|
|
|
|
Loans receivable (5)
|
$
|
1,044,117
|
|
|
$
|
1,027,289
|
|
|
|
|
|
Total assets
|
$
|
1,699,244
|
|
|
$
|
1,565,978
|
|
___________________________________
(1) As of March 31, 2021 and September 30, 2020, there were no one- to-four family properties in the process of foreclosure.
(2) As of March 31, 2021 and September 30, 2020, the balance of OREO did not include any foreclosed residential real estate property.
(3) Does not include TDRs on accrual status.
(4) Does not include TDRs totaling $192 and $203 reported as non-accrual loans at March 31, 2021 and September 30, 2020, respectively.
(5) Does not include loans held for sale and loan balances are before the allowance for loan losses.
The Company has received, and continues to receive, inquiries and requests from borrowers for some type of payment relief due to the COVID 19-pandemic. In response, the Company has made payment deferral modifications (typically 90-day payment deferral with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All loans modified due to COVID-19 are separately monitored, and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. For additional information on these loan modifications, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
Comparison of Operating Results for the Three and Six Months Ended March 31, 2021 and 2020
Net income increased by $2.20 million, or 43.6%, to $7.25 million for the quarter ended March 31, 2021 from $5.05 million for the quarter ended March 31, 2020. Net income per diluted common share increased by $0.26, or 43.3%, to $0.86 for the quarter ended March 31, 2021 from $0.60 for the quarter ended March 31, 2020. The increases in net income and net income per diluted common share for the three months ended March 31, 2021 were primarily due to a $2.00 million decrease in the provision for loan losses and a $1.21 million increase in non-interest income, which were partially offset by a $312,000 decrease in net interest income, a $265,000 increase in non-interest expense, and a $427,000 increase in the provision for income taxes.
Net income increased by $2.84 million, or 24.3%, to $14.54 million for the six months ended March 31, 2021 from $11.70 million for the six months ended March 31, 2020. Net income per diluted common share increased by $0.35, or 25.4%, to $1.73 for the six months ended March 31, 2021 from $1.38 for the six months ended March 31, 2021. The increases in net income and net income per diluted common share were primarily due to a $2.20 million decrease in the provision for loan losses and a $1.83 million increase in non-interest income, which were partially offset by a $302,000 increase in non-interest expense, a $291,000 decrease in net interest income, and a $594,000 increase 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 $313,000, or 2.4%, to $12.57 million for the quarter ended March 31, 2021 from $12.88 million for the quarter ended March 31, 2020. The decrease in net interest income was primarily due to a decrease in the average yield of interest-earning assets, which was partially offset by an increase in the average balance on interest-earnings assets and a decline in the average cost of interest-bearing liabilities.
Total interest and dividend income decreased by $771,000, or 5.5%, to $13.36 million for the quarter ended March 31, 2021 from $14.13 million for the quarter ended March 31, 2020, primarily due to a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased to 3.41% for the quarter ended March 31, 2021 from 4.68% for the quarter ended March 31, 2020, as market interest rates decreased following the 150 basis point decline in the targeted federal funds rate in March 2020 in response to the COVID-19 pandemic, to a range of 0.00% to 0.25% at March 31, 2021. Partially offsetting the decrease in the average yield on interest earning assets was an increase in the average balance of interest-earning assets. Average total interest-earning assets increased by $360.57 million, or 29.9%, to $1.57 billion for the quarter ended March 31, 2021 from $1.21 billion for the quarter ended March 31, 2020. Average loans receivable increased by $122.47 million, or 13.3%, average investment securities increased by $19.36 million, or 25.3%, and average interest-bearing deposits in banks and CDs increased by $218.35 million, or 107.1%, between the periods. During the quarter ended March 31, 2021, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $86,000 compared to $107,000 for the quarter ended March 31, 2020. 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 March 31, 2021, there was a total of $129,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $320,000 collected for the quarter ended March 31, 2020. Also impacting the average yield and average interest-earning asset balances during the current quarter were SBA PPP loans originated. These PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each loan. For the quarter ended March 31, 2021, average PPP loans were $124.48 million and the Company recorded $306,000 in interest income and accreted $1.14 million in PPP loan origination fees into income. At March 31, 2021, PPP deferred loan origination fees of $3.86 million remain to be accreted into interest income during the remaining life of the loans.
Total interest expense decreased by $458,000, or 36.6%, to $793,000 for the quarter ended March 31, 2021 from $1.25 million for the quarter ended March 31, 2020. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, which was partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.33% for the quarter ended March 31, 2021 from 0.63% for the quarter ended March 31, 2020. Average interest-bearing liabilities increased by $168.00 million, or 21.1%, to $965.95 million for the quarter ended March 31, 2021 from $797.95 million for the quarter ended March 31, 2020, due to increases in the average balances of savings accounts, NOW checking accounts, money market accounts, and borrowings.
As a result of these changes, the net interest margin ("NIM") decreased to 3.21% for the quarter ended March 31, 2021 from 4.27% for the quarter ended March 31, 2020.
Net interest income decreased by $291,000, or 1.1%, to $25.59 million for the six months ended March 31, 2021 from $25.88 million for the six months ended March 31, 2020. The decrease in net interest income was primarily due to a decrease in the average yield of interest-earning assets, which was partially offset by an increase in the average balance on interest-earning assets and a decline in the average cost of interest-bearing liabilities.
Total interest and dividend income decreased by $1.01 million, or 3.5%, to $27.32 million for the six months ended March 31, 2021 from $28.32 million for the six months ended March 31, 2020, primarily due to a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased to 3.56% for the six months ended March 31, 2021 from 4.76% for the six months ended March 31, 2020 as market interest rates decreased following the 150 basis point decline in the targeted federal funds rate in March 2020 in response to the COVID-19 pandemic, to a range of 0.00% to 0.25% at March 31, 2021. Substantially offsetting the decrease in the average yield on interest-earning assets was an increase in the average balance of interest-earning assets. Average total interest-earning assets increased by $342.25 million, or 28.7%, to $1.53 billion for the six months ended March 31, 2021 from $1.19 billion for the six months ended March 31, 2020. Average loans receivable increased by $120.37 million, or 13.1%, average investment securities increased by $23.47 million, or 34.3%, and average interest-bearing deposits in banks and CDs increased by $197.96 million, or 98.9%, between the periods.
Total interest expense decreased by $714,000, or 29.3%, to $1.73 million for the six months ended March 31, 2021 from $2.44 million for the six months ended March 31, 2020. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, which was partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.36% for the six months ended March 31, 2021 from 0.62% for the six months ended March 31, 2020. Average interest-bearing liabilities increased by $165.25 million, or 21.1%, to $949.93 million for the six months ended March 31, 2021 from $784.68 million for the six months ended March 31, 2020, due to increases in the average balances of savings accounts, NOW checking accounts, money market accounts, and borrowings.
As a result of these changes, the NIM decreased to 3.34% for the six months ended March 31, 2021 from 4.35% for the six months ended March 31, 2020.
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 March 31,
|
|
2021
|
|
2020
|
|
Average
Balance
|
|
Interest and
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest and
Dividends
|
|
Yield/
Cost
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (1)(2)
|
$
|
1,044,476
|
|
|
$
|
12,791
|
|
|
4.90
|
%
|
|
$
|
922,011
|
|
|
$
|
12,823
|
|
|
5.56
|
%
|
Investment securities (2)
|
95,771
|
|
|
284
|
|
|
1.19
|
|
|
76,412
|
|
|
489
|
|
|
2.56
|
|
Dividends from mutual funds, FHLB stock and other investments
|
5,904
|
|
|
28
|
|
|
1.92
|
|
|
5,513
|
|
|
35
|
|
|
2.54
|
|
Interest-bearing deposits in banks and CDs
|
422,286
|
|
|
258
|
|
|
0.24
|
|
|
203,936
|
|
|
784
|
|
|
1.54
|
|
Total interest-earning assets
|
1,568,437
|
|
|
13,361
|
|
|
3.41
|
|
|
1,207,872
|
|
|
14,131
|
|
|
4.68
|
|
Non-interest-earning assets
|
85,203
|
|
|
|
|
|
|
85,226
|
|
|
|
|
|
Total assets
|
$
|
1,653,640
|
|
|
|
|
|
|
$
|
1,293,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
$
|
236,504
|
|
|
48
|
|
|
0.08
|
|
|
$
|
178,688
|
|
|
52
|
|
|
0.12
|
|
Money market
|
178,768
|
|
|
134
|
|
|
0.30
|
|
|
143,817
|
|
|
207
|
|
|
0.58
|
|
NOW checking
|
394,612
|
|
|
153
|
|
|
0.16
|
|
|
303,403
|
|
|
234
|
|
|
0.31
|
|
Certificates of deposit
|
146,065
|
|
|
429
|
|
|
1.19
|
|
|
169,293
|
|
|
750
|
|
|
1.78
|
|
Short-term borrowings
|
3
|
|
|
—
|
|
|
0.23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
10,000
|
|
|
29
|
|
|
1.16
|
|
|
2,747
|
|
|
8
|
|
|
1.17
|
|
Total interest-bearing liabilities
|
965,952
|
|
|
793
|
|
|
0.33
|
|
|
797,948
|
|
|
1,251
|
|
|
0.63
|
|
Non-interest-bearing deposits
|
482,528
|
|
|
|
|
|
|
306,907
|
|
|
|
|
|
Other liabilities
|
10,365
|
|
|
|
|
|
|
10,982
|
|
|
|
|
|
Total liabilities
|
1,458,845
|
|
|
|
|
|
|
1,115,837
|
|
|
|
|
|
Shareholders' equity
|
194,795
|
|
|
|
|
|
|
177,261
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
shareholders' equity
|
$
|
1,653,640
|
|
|
|
|
|
|
$
|
1,293,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
$
|
12,568
|
|
|
|
|
|
|
$
|
12,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
4.05
|
%
|
Net interest margin (3)
|
|
|
|
|
3.21
|
%
|
|
|
|
|
|
4.27
|
%
|
Ratio of average interest-earning
assets to average interest- bearing liabilities
|
|
|
|
|
162.37
|
%
|
|
|
|
|
|
151.37
|
%
|
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
2021
|
|
2020
|
|
Average
Balance
|
|
Interest and
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest and
Dividends
|
|
Yield/
Cost
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (1)(2)
|
$
|
1,037,304
|
|
|
$
|
26,108
|
|
|
5.03
|
%
|
|
$
|
916,931
|
|
|
$
|
25,587
|
|
|
5.58
|
%
|
Investment securities (2)
|
91,912
|
|
|
585
|
|
|
1.27
|
|
|
68,440
|
|
|
928
|
|
|
2.71
|
|
Dividends from mutual funds, FHLB stock and other investments
|
5,900
|
|
|
55
|
|
|
1.87
|
|
|
5,453
|
|
|
72
|
|
|
2.64
|
|
Interest-bearing deposits in banks and CDs
|
398,067
|
|
|
569
|
|
|
0.29
|
|
|
200,107
|
|
|
1,735
|
|
|
1.73
|
|
Total interest-earning assets
|
1,533,183
|
|
|
27,317
|
|
|
3.56
|
|
|
1,190,931
|
|
|
28,322
|
|
|
4.76
|
|
Non-interest-earning assets
|
84,635
|
|
|
|
|
|
|
84,311
|
|
|
|
|
|
Total assets
|
$
|
1,617,818
|
|
|
|
|
|
|
$
|
1,275,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
$
|
229,610
|
|
|
96
|
|
|
0.08
|
|
|
$
|
176,628
|
|
|
86
|
|
|
0.10
|
|
Money market
|
173,579
|
|
|
272
|
|
|
0.31
|
|
|
138,758
|
|
|
396
|
|
|
0.57
|
|
NOW checking
|
386,093
|
|
|
330
|
|
|
0.17
|
|
|
299,884
|
|
|
454
|
|
|
0.30
|
|
Certificates of deposit
|
150,645
|
|
|
970
|
|
|
1.29
|
|
|
168,039
|
|
|
1,496
|
|
|
1.78
|
|
Short-term borrowings
|
2
|
|
|
—
|
|
|
0.13
|
|
|
1
|
|
|
—
|
|
|
2.53
|
|
Long-term borrowings
|
10,000
|
|
|
58
|
|
|
1.16
|
|
|
1,366
|
|
|
8
|
|
|
1.17
|
|
Total interest-bearing liabilities
|
949,929
|
|
|
1,726
|
|
|
0.36
|
|
|
784,676
|
|
|
2,440
|
|
|
0.62
|
|
Non-interest-bearing deposits
|
465,251
|
|
|
|
|
|
|
306,175
|
|
|
|
|
|
Other liabilities
|
10,528
|
|
|
|
|
|
|
9,394
|
|
|
|
|
|
Total liabilities
|
1,425,708
|
|
|
|
|
|
|
1,100,245
|
|
|
|
|
|
Shareholders' equity
|
192,110
|
|
|
|
|
|
|
174,997
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
shareholders' equity
|
$
|
1,617,818
|
|
|
|
|
|
|
$
|
1,275,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
$
|
25,591
|
|
|
|
|
|
|
$
|
25,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
4.14
|
%
|
Net interest margin (3)
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
4.35
|
%
|
Ratio of average interest-earning
assets to average interest-bearing liabilities
|
|
|
|
|
161.40
|
%
|
|
|
|
|
|
151.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on the net interest income of the Company. Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns). Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2021
compared to three months
ended March 31, 2020
increase (decrease) due to
|
|
Six months ended
March 31, 2021
compared to six months
ended March 31, 2020
increase (decrease) due to
|
|
Rate
|
|
Volume
|
|
Net
Change
|
|
Rate
|
|
Volume
|
|
Net
Change
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable and loans held for sale
|
$
|
(1,628)
|
|
|
$
|
1,596
|
|
|
$
|
(32)
|
|
|
$
|
(1,214)
|
|
|
$
|
1,735
|
|
|
$
|
521
|
|
Investment securities
|
(308)
|
|
|
103
|
|
|
(205)
|
|
|
(402)
|
|
|
59
|
|
|
(343)
|
|
Dividends from mutual funds, FHLB stock and other investments
|
(10)
|
|
|
3
|
|
|
(7)
|
|
|
(18)
|
|
|
1
|
|
|
(17)
|
|
Interest-bearing deposits in banks and CDs
|
(970)
|
|
|
444
|
|
|
(526)
|
|
|
(1,319)
|
|
|
153
|
|
|
(1,166)
|
|
Total net increase (decrease) in income on interest-earning assets
|
(2,916)
|
|
|
2,146
|
|
|
(770)
|
|
|
(2,953)
|
|
|
1,948
|
|
|
(1,005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
(18)
|
|
|
14
|
|
|
(4)
|
|
|
(6)
|
|
|
16
|
|
|
10
|
|
Money market
|
(115)
|
|
|
42
|
|
|
(73)
|
|
|
(143)
|
|
|
19
|
|
|
(124)
|
|
NOW checking
|
(138)
|
|
|
57
|
|
|
(81)
|
|
|
(153)
|
|
|
29
|
|
|
(124)
|
|
Certificates of deposit
|
(227)
|
|
|
(94)
|
|
|
(321)
|
|
|
(383)
|
|
|
(143)
|
|
|
(526)
|
|
FHLB borrowings
|
—
|
|
|
21
|
|
|
21
|
|
|
—
|
|
|
50
|
|
|
50
|
|
Total net increase (decrease) in expense on interest-bearing liabilities
|
(498)
|
|
|
40
|
|
|
(458)
|
|
|
(685)
|
|
|
(29)
|
|
|
(714)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net interest income
|
$
|
(2,418)
|
|
|
$
|
2,106
|
|
|
$
|
(312)
|
|
|
$
|
(2,268)
|
|
|
$
|
1,977
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|
$
|
(291)
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Provision for Loan Losses: There was no provision for loan losses made for the quarter ended March 31, 2021 compared to a $2.00 million provision for loans losses for the quarter ended March 31, 2020 due primarily to improvement in forecasted probable credit losses from the COVID-19 pandemic on the economy as of March 31, 2021.. For the quarter ended March 31, 2021, there were net recoveries of $2,000 compared to net recoveries of $8,000 for the quarter ended March 31, 2020. Non-accrual loans decreased by $600,000 or 20.7%, to $2.31 million at March 31, 2021, from $2.91 million at September 30, 2020 and decreased by $911,000, or 28.3%, from $3.22 million at March 31, 2020. Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $180,000, or 4.8%, to $3.93 million at March 31, 2021, from $3.75 million at September 30, 2020 and increased by $495,000, or 14.4%, from $3.43 million one year ago.
The $138.18 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at March 31, 2021, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.
There was no provision for loan losses made for the six months ended March 31, 2021 compared to a $2.20 million provision for loan losses for the six months ended March 31, 2020 due primarily to forecasted probable credit losses reflecting the potential future impact of the COVID-19 pandemic on the economy as of March 31, 2020. For the six months ended March 31, 2021, there were net recoveries of $20,000 compared to no net charge-offs for the six months ended March 31, 2020.
The Company has established a comprehensive methodology for determining the allowance for loan losses. On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio. These
factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan. The aggregate principal impairment reserve amount determined at March 31, 2021 was $73,000 compared to $41,000 at September 30, 2020 and $89,000 at March 31, 2020.
In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. The remaining fair value discount on loans acquired in the South Sound Acquisition was $583,000 at March 31, 2021. The Company believes that this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.
Based on its comprehensive analysis, management believes that the allowance for loan losses of $13.43 million at March 31, 2021 (1.29% of loans receivable and 582.8% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date. The allowance for loan losses was $13.41 million (1.31% of loans receivable and 461.8% of non-performing loans) at September 30, 2020 and $11.89 mil1ion (1.29% of loans receivable and 369.7% of non-performing loans) at March 31, 2020. While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate. A decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”
Non-interest Income: Total non-interest income increased by $1.21 million, or 32.8%, to $4.89 million for the quarter ended March 31, 2021 from $3.68 million for the quarter ended March 31, 2020. The increase was primarily due to a $1.02 million increase in gain on sales of loans, a $438,000 valuation recovery on servicing rights, a $222,000 increase in ATM and debit card interchange transaction fees, and smaller increases in several other categories. These increases to non-interest income were partially offset by a $293,000 decrease in the other non-interest income category, a $137,000 decrease in service charges on deposits, and smaller decreases in several other categories. The increase in 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 and an increase in the average pricing margin compared to the same period last year. The increased mortgage banking volumes were largely due to increased refinance activity for single family homes. The valuation recovery on servicing rights was primarily due to a decrease in the projected mortgage prepayment speeds as mortgage interest rates increased during the quarter. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the dollar volume of debit card transactions. The decrease in the other non-interest income category was related to a non-recurring $283,000 recovery (during the quarter ended March 31, 2020) of a previously charged off receivable acquired in the South Sound Acquisition. The decrease in service charges on deposits was primarily due to a decrease in overdraft fee income.
Total non-interest income for the six months ended March 31, 2021 increased by $1.83 million, or 24.0%, to $9.46 million from $7.62 million for the six months ended March 31, 2020. This increase was primarily due to a $2.07 million increase in gain on sales of loans, a $284,000 increase in ATM and debit card interchange transaction fees, a $202,000 valuation recovery on servicing rights (compared to a $23,000 valuation allowance in the comparable period one year ago), and smaller increases in several other categories. These increases were partially offset by a $293,000 decrease in the other non-interest income category (primarily due the $283,000 recovery discussed above), a $282,000 decrease in services charges on deposits, and smaller decreases in several other categories.
Non-interest Expense: Total non-interest expense increased by $265,000, or 3.2%, to $8.55 million for the quarter ended March 31, 2021 from $8.29 million for the quarter ended March 31, 2020. This increase was primarily due to a $157,000 increase in salary and employee benefits expense and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in salaries and employee benefits expense was primarily due to annual salary adjustments. The efficiency ratio for the current quarter improved to 48.99% from 50.04% for the comparable quarter one year ago.
Total non-interest expense increased by $302,000, or 1.8%, to $16.96 million for the six months ended March 31, 2021 from $16.66 million for the six months ended March 31, 2020. The increase was primarily due to a $228,000 increase in FDIC insurance expense and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in FDIC insurance expense was primarily due an assessment credit which reduced the expense in the comparable period one year ago. The efficiency ratio for the six months ended March 31, 2021 improved to 48.41% from 49.73% for the six months ended March 31, 2020.
Provision for Income Taxes: The provision for income taxes increased by $426,000, or 34.8%, to $1.65 million for the quarter ended March 31, 2021 from $1.23 million for the quarter ended March 31, 2020, primarily due to higher income before income taxes. The provision for income tax increased by $594,000, or 20.2%, to $3.53 million for the six months ended March 31, 2021 from $2.94 million for the six months ended March 31, 2020. The Company's effective income tax rate was 18.56% for the quarter ended March 31, 2021 and 19.53% for the quarter ended March 31, 2020. The Company's effective tax rate was 19.55% for the six months ended March 31, 2020 and 20.08% for the six months ended March 31, 2020. The effective income tax rates for both the three and six months ended March 31, 2021 were lower primarily due to tax benefits recognized from the disposition of stock options.
Liquidity
The Company’s primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed). While 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.
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 and other short-term investments.
The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2021, 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 34.52%.
The Company’s total cash and cash equivalents and CDs held for investment increased by $93.02 million, or 24.5%, to $473.02 million at March 31, 2021 from $380.00 million at September 30, 2020. If the Bank requires funds that exceed its ability to generate them internally, it has additional borrowing capacity with the FHLB, the Federal Reserve Bank of San Francisco ("FRB") and Pacific Coast Bankers' Bank ("PCBB"). At March 31, 2021, 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. At March 31, 2021, the Bank had $10.00 million in FHLB borrowings outstanding and $378.24 million available for additional FHLB borrowings. Additionally, the Bank maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral. At March 31, 2021, the Bank had $63.76 million available for borrowings with the FRB and there was no outstanding balance on this borrowing line. Additionally, the Federal Reserve recently established the Paycheck Protection Program Liquidity Facility ("PPPLF") to improve the effectiveness of the PPP. As of March 31, 2021, the Bank was approved to utilize the PPPLF, which allows banks to pledge PPP loans at face value as collateral to obtain FRB non-recourse loans. There were no borrowings outstanding under this program during the quarter ended March 31, 2021. The Bank also maintains a $50.00 million overnight borrowing line with PCBB. At March 31, 2021, the Bank did not have an outstanding balance on this borrowing line.
The Bank’s primary investing activity is the origination of one- to four-family mortgage loans, commercial mortgage loans, construction loans, consumer loans, and commercial business loans. At March 31, 2021, the Bank had loan commitments totaling $107.65 million and undisbursed construction loans in process totaling $90.55 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. CDs that are scheduled to mature in less than one year from March 31, 2021 totaled $91.32 million.
Capital Resources
The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
Based on its capital levels at March 31, 2021, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at March 31, 2021, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.
The following table compares the Bank’s actual capital amounts at March 31, 2021 to its minimum regulatory capital requirements at that date (dollars in thousands):
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Actual
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Regulatory
Minimum To
Be “Adequately
Capitalized”
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To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions
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Amount
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Ratio
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Amount
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Ratio
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Amount
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Ratio
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Leverage Capital Ratio:
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Tier 1 capital
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$179,906
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|
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10.90
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%
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|
$65,997
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|
|
4.00
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%
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|
$82,497
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|
|
5.00
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%
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Risk-based Capital Ratios:
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Common equity tier 1 capital
|
179,906
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19.12
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42,340
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4.50
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61,158
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|
6.50
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Tier 1 capital
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179,906
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19.12
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56,453
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6.00
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75,271
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8.00
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Total capital
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191,692
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20.37
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75,271
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8.00
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94,089
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10.00
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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 March 31, 2021, 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 March 31, 2021, 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 March 31, 2021 (dollars in thousands):
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Actual
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Amount
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Ratio
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Leverage Capital Ratio:
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Tier 1 capital
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$183,374
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11.19
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%
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Risk-based Capital Ratios:
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Common equity tier 1 capital
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183,374
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|
19.47
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Tier 1 capital
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183,374
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19.47
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Total capital
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195,171
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20.72
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Key Financial Ratios and Data
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Three Months Ended March 31,
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Six Months Ended
March 31,
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2021
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2020
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2021
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2020
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PERFORMANCE RATIOS:
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Return on average assets
|
1.75
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%
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1.56
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%
|
|
1.80
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%
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|
1.84
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%
|
Return on average equity
|
14.89
|
%
|
|
11.39
|
%
|
|
15.14
|
%
|
|
13.37
|
%
|
Net interest margin
|
3.21
|
%
|
|
4.27
|
%
|
|
3.34
|
%
|
|
4.35
|
%
|
Efficiency ratio
|
48.99
|
%
|
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50.04
|
%
|
|
48.41
|
%
|
|
49.73
|
%
|