Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2021; unaudited. Timberland Bancorp is a community bank holding company operating primarily in western Washington. Unless noted, amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Three months ended Mar. 31, 2021 | Three months ended Mar. 31, 2020 | Six months ended Mar. 31, 2021 | Six months ended Mar. 31, 2020 |
|---|---|---|---|---|
| Net interest income | $12.57 | $12.88 | $25.59 | $25.88 |
| Provision for loan losses | — | $2.00 | — | $2.20 |
| Non-interest income | $4.89 | $3.68 | $9.45 | $7.62 |
| Non-interest expense | $8.55 | $8.29 | $16.96 | $16.66 |
| Net income | $7.25 | $5.05 | $14.54 | $11.70 |
| Diluted EPS | $0.86 | $0.60 | $1.73 | $1.38 |
| Net interest margin | 3.21% | 4.27% | 3.34% | 4.35% |
| Efficiency ratio | 48.99% | 50.04% | 48.41% | 49.73% |
Quarterly net income rose 43.6% and six-month net income rose 24.3%. Management attributed the increases chiefly to lower loan-loss provisions and higher non-interest income, partly offset by weaker net interest income and higher expenses and taxes. Loan-sale gains were $1.76 million for the quarter and $3.76 million for the six months, up from $0.74 million and $1.69 million, respectively.
Net interest margin fell as asset yields declined following the March 2020 federal funds rate cuts. Quarterly average earning-asset yield was 3.41%, versus 4.68% a year earlier; the average cost of interest-bearing liabilities declined to 0.33% from 0.63%. Management said it expected low rates and pandemic-related conditions to continue to pressure net interest income and margin.
Financial position, cash flow, and liquidity
- At March 31, 2021, total assets were $1.699 billion, up 8.5% from September 30, 2020. Net loans were $1.031 billion, up 1.7%; deposits were $1.482 billion, up 9.1%; and shareholders’ equity was $198.54 million, up 5.8%.
- Cash and cash equivalents were $433.34 million; CDs held for investment were $39.67 million. Combined, these balances were $473.02 million, up $93.02 million from September 2020. Deposit growth exceeded funds used for loan originations and securities purchases.
- Six-month cash flow: operating activities provided $10.17 million; investing activities used $10.95 million; financing activities provided $119.67 million. Cash and cash equivalents increased $118.89 million to $433.34 million.
- FHLB borrowings remained $10.0 million. The Bank reported $378.24 million of additional FHLB borrowing availability, $63.76 million available from the Federal Reserve, and a $50 million overnight line with Pacific Coast Bankers’ Bank; neither the Federal Reserve nor PCBB line had an outstanding balance. The regulatory liquidity ratio was 34.52%.
- The Bank was classified as well-capitalized. Its March 31 ratios included a 10.90% leverage ratio, 19.12% common equity tier 1 ratio, and 20.37% total capital ratio.
Material changes and asset quality
- Deposit growth was concentrated in non-interest-bearing demand, savings, NOW, and money-market accounts; certificates of deposit declined. Non-interest-bearing demand deposits were 33.7% of total deposits.
- PPP loans were $138.18 million at quarter-end, up from $126.82 million at September 2020. They represented 12.1% of gross loans and were excluded from the normal allowance calculation because they are SBA-guaranteed. The Company began originating renewed PPP loans in January 2021.
- The allowance for loan losses was $13.43 million, or 1.29% of loans; management considered it adequate. Non-performing assets declined to $2.65 million, or 0.16% of assets, from $4.16 million, or 0.27%, at September 2020. Non-accrual loans were $2.31 million.
- Eight COVID-related modified loans totaling $12.88 million remained on deferral at March 31; borrowers were paying interest monthly on five totaling $8.46 million. The majority of previously modified borrowers had resumed payments.
- Loan originations for the six months were $323.72 million, up 38.9% year over year, reflecting PPP lending, mortgage refinances, and larger commercial real estate and business loans. Fixed-rate one- to four-family loan sales were $85.13 million, up 37.2%.
- Quarterly dividends were $0.31 per share, versus $0.20 a year earlier. A new repurchase authorization permits purchases of up to 415,970 shares; none were repurchased under it by March 31.
Outlook, risks, and unusual items
The filing provides no specific earnings or financial guidance. Management cited the low-rate environment and uncertainty about the duration and economic effects of COVID-19 as potential continuing pressures on net interest income and margin. It also identified credit deterioration, real estate values, deposit retention, competition, regulatory actions, technology and cybersecurity disruptions, and changes in interest rates and funding conditions among risks that could cause actual results to differ materially from forward-looking statements.
No loan-loss provision was recorded in the quarter or six-month period, which management attributed primarily to an improving economic outlook and lower forecasted probable COVID-related losses. The filing cautions that future deterioration could require higher reserves. The Company anticipated that adoption of the current expected credit loss standard (CECL) would increase the allowance, but said the amount was not yet determinable. Management reported no material legal proceedings, no material change in disclosed risk factors, and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether the improvement in earnings persists when the benefit of having no loan-loss provision and elevated mortgage-sale activity changes.
- How quickly the $3.86 million of remaining PPP deferred origination fees are recognized, and the pace of SBA forgiveness and reimbursement.
- Whether the remaining COVID-related deferrals, delinquency trends, and commercial real estate exposures affect credit quality or reserve adequacy.
- Whether strong deposit inflows and excess liquidity continue, and how lower asset yields affect net interest margin.
- The eventual CECL allowance impact and any changes in regulatory capital, liquidity, or repurchase and dividend capacity.