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Timberland Bancorp Announces Third Fiscal Quarter Earnings

Share:
  • Net Income of $6.21 Million and EPS of $0.74
  • PPP Loan Originations of $123 million
  • Return on Average Assets of 1.70%
  • Return on Average Equity of 13.83%
  • Announces $0.20 Quarterly Cash Dividend

HOQUIAM, Wash., July 28, 2020 (GLOBE NEWSWIRE) -- Timberland Bancorp, Inc. (NASDAQ:TSBK) ("Timberland" or "the Company") today reported net income of $6.21 million for the quarter ended June 30, 2020 compared to $5.05 million for the preceding quarter and $5.96 million for the comparable quarter one year ago.  Earnings per diluted common share ("EPS") were $0.74 for the current quarter compared to $0.60 for the preceding quarter and $0.70 for the comparable quarter one year ago.  Net income for the quarters ended June 30, 2020 and March 31, 2020 was reduced by provisions to the loan loss reserve of $1.00 million and $2.00 million, respectively, due to economic uncertainties associated with the COVID-19 pandemic. 

For the first nine months of fiscal 2020, Timberland earned $17.91 million, or $2.12 per diluted common share, compared to net income of $17.69 million, or $2.09 per diluted common share, for the first nine months of fiscal 2019.

Timberland's Board of Directors declared a quarterly cash dividend to shareholders of $0.20 per common share payable on August 28, 2020, to shareholders of record August 14, 2020.

"Timberland generated strong fiscal third quarter financial results in the midst of a decidedly unsettled economic environment," commented Michael Sand, President and CEO.  "Uncharacteristically, deposits grew nearly $193 million during the quarter and Timberland's active involvement in the Small Business Administration's Paycheck Protection Program ("PPP") elevated the quarter's loan originations to a record $250 million.  Increased deposit inflows combined with yet unspent PPP loan proceeds temporarily persisting in our deposit base created excess liquidity precisely at a time when attractive, short term, investment alternatives were, and remain, particularly scarce.  As a result, we will take a measured approach to investing a significant portion of this excess liquidity until the durability of these deposits and the direction of the economy become more certain."

"We remain committed to assisting our borrowers who have been affected by COVID related declines in business revenues," Sand continued.  "We have offered assistance with payment deferrals and interest-only payment options since late March and have provided loan accommodations on 184 loans to commercial customers with balances totaling $128.7 million.  Our standard accommodation is a 90-day deferral with payments fully deferred or with interest scheduled for payment monthly.  Of these 184 loans, 137 were scheduled to resume payments on, or before, July 1, 2020.  As of July 23rd, payments were made on 127 (or 93%) of these 137 loans, including five that were paid in full.  We have 47 loans scheduled for payment resumption during the next two months.  The COVID related deferrals of consumer and residential mortgage loans have been modest by number with 25 loans totaling $7.1 million being placed temporarily in deferral status.  We will continue to monitor our loan portfolio diligently in light of the significant impact the Coronavirus could have on borrowers in the months to come."

"A major concern of ours remains the health and safety of our customers and employees," said Sand.  "We implemented several new COVID-19 protocols to assist and protect our employees and customers. We have taken a patient approach to reopening branches following the termination of the State of Washington's Stay Home, Stay Healthy order, which was lifted May 31, 2020.  Near normal branch operations have resumed in our Grays Harbor and Lewis county branches, while lobby access is by appointment only in our Thurston, Pierce, King and Kitsap county branches.  We continue to provide drive-up services, ATM machines, mobile banking and call center operations with every effort being made to maintain the high level of service our customers are accustomed to receiving."

On March 16, 2020, Timberland made the decision to temporarily suspend all stock buyback activity. From January 1 - March 16, 2020, Timberland had repurchased 56,601 shares of its stock.

Third Fiscal Quarter 2020 Earnings and Balance Sheet Highlights (at or for the period ended June 30, 2020, compared to March 31, 2020, or June 30, 2019):

Earnings Highlights:

  • Net income for the first nine months of fiscal 2020 was $17.91 million compared to $17.69 million for the first nine months of fiscal 2019; EPS was $2.12 for the first nine months of fiscal 2020 compared to $2.09 for the first nine months of fiscal 2019;
  • Net income was $6.21 million for the current quarter compared to $5.05 million for the preceding quarter and $5.96 million for the comparable quarter one year ago;  EPS was $0.74 for the current quarter compared to $0.60 for the preceding quarter and $0.70 for the comparable quarter one year ago;
  • Return on average equity and return on average assets for the current quarter were 13.83% and 1.70%, respectively;
  • Net interest margin was 3.63% for the current quarter compared to 4.27% for the preceding quarter and 4.49% for the comparable quarter one year ago; and
  • Efficiency ratio improved to 49.96% for the current quarter from 54.43% for the comparable quarter one year ago and 50.04% for the preceding quarter.

Balance Sheet Highlights:

  • Total assets increased 22% year-over-year and 15% from the prior quarter;
  • Total deposits increased 23% year-over-year and 17% from the prior quarter;
  • Net loans receivable increased 16% year-over-year and 12% from the prior quarter; and
  • Book and tangible book (non-GAAP) values per common share increased to $22.00 and $19.97, respectively, at June 30, 2020.

Operating Results

Operating revenue (net interest income before the provision for loan losses, plus non-interest income excluding recoveries on investment securities, gains on sale of investment securities and BOLI death benefit claims) increased 6% to $17.33 million from $16.37 million for the comparable quarter one year ago and increased 5% from $16.56 million for the preceding quarter.  Operating revenue increased 7% to $50.72 million for the first nine months of fiscal 2020 from $47.61 million for the comparable period one year ago.

Net interest income decreased 3% to $12.48 million for the current quarter from $12.88 million from the preceding quarter and decreased 4% from $12.94 million for the comparable quarter one year ago.  Timberland's net interest margin ("NIM") for the current quarter was 3.63% compared to 4.27% for the preceding quarter and 4.49% for the comparable quarter one year ago.  The NIM for the current quarter was increased by approximately ten basis points due to the accretion of $170,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $177,000 in pre-payment penalties, non-accrual interest, and late fees.  The NIM for the preceding quarter was increased by approximately 15 basis points due to the accretion of $107,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $320,000 in pre-payment penalties, non-accrual interest and late fees.  The NIM for the comparable quarter one year ago was increased by approximately six basis points due to the accretion of $69,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $88,000 of non-accrual interest. 

The NIM compression during the current quarter was primarily due to decreased market interest rates, increased levels of liquidity and PPP loans.  In March 2020, the Federal Reserve reduced the targeted federal funds interest rate by 150 basis points in response to the COVID-19 pandemic.  Timberland's liquid funds also increased during the quarter as average interest- earning deposits in banks and CDs increased by $74.22 million, or 36%, to $278.16 million for the quarter ended June 30, 2020 from $203.94 million for the quarter ended March 31, 2020.  Timberland also originated $122.58 million in PPP loans during the current quarter at the Program's prescribed 1.00% interest rate.  PPP loans are subject to loan origination fees which are accreted into interest income over the life of each loan.  During the quarter ended June 30, 2020, Timberland recorded $240,000 in interest income on PPP loans and accreted $443,000 in PPP loan origination fees into income.  At June 30, 2020, Timberland had $4.02 million in PPP deferred loan origination fees remaining, which will be accreted into interest income over the remaining life of the loans.  

Net interest income increased 1% to $38.36 million for the first nine months of fiscal 2020 from $38.01 million for the first nine months of fiscal 2019.  Timberland's NIM for the first nine months of fiscal 2020 was 4.08% compared to 4.49% for the first nine months of fiscal 2019.

A $1.00 million provision for loan losses was made during the current quarter compared to a $2.00 million provision for loan losses for the preceding quarter and no provision for loan losses for the comparable quarter one year ago.  The current quarter's provision was due to continued economic uncertainties associated with the COVID-19 pandemic.  As a result of the $1.00 million provision, Timberland's allowance for loan losses ("ALL") increased 8% to $12.89 million at June 30, 2020 from $11.89 million at March 31, 2020.

Non-interest income increased 37% to $4.86 million for the current quarter from $3.54 million for the comparable quarter one year ago and increased 32% from $3.68 million for the preceding quarter.  The increase in non-interest income compared to the preceding quarter was primarily due to a $1.40 million increase in gain on sale of loans and smaller increases in several other categories.  These increases were partially offset by a $220,000 decrease in service charges on deposits and smaller decreases in several other categories.  The increase in gain on sale of loans was primarily due to an increase in the dollar amount of fixed rate one- to four-family loans sold during the current quarter and an increase in the pricing margin.  The increased mortgage banking volumes were largely due to increased refinance activity for single family homes due to lower mortgage interest rates.  The decrease in service charges on deposits was primarily due to a decrease in overdraft fee income.  Also impacting the non-interest income total for current quarter was a $200,000 recovery on a previously charged-off receivable acquired in the South Sound Acquisition.  This recovery is recorded in the "Other" non-interest income category for the current quarter.  Fiscal year-to-date non-interest income increased 16% to $12.47 million from $10.74 million for the first nine months of fiscal 2019.  The fiscal year-to-date increase was primarily due to increased gain on sale of loans, which was partially offset by decreased BOLI income (as a result of a BOLI death benefit claim in the prior fiscal year).

Total operating expenses for the current quarter decreased 3% to $8.66 million from $8.97 million for the comparable quarter one year ago and increased 5% from $8.29 million for the preceding quarter.  The increase in operating expenses compared to the preceding quarter was primarily due to a $143,000 increase in FDIC insurance expense, a $134,000 increase in premises and equipment expense, and smaller increases in several other categories.  The increase in FDIC insurance expense was primarily a result of the Company's FDIC insurance credit being fully expended in prior quarters.  The increase in premises and equipment expense was primarily due to expenses associated with the relocation of Company's Data Center and other COVID-19 pandemic related expenses.  The efficiency ratio for the current quarter improved to 49.96% from 54.43% for the comparable quarter one year ago and 50.04% for the preceding quarter.  Fiscal year-to-date operating expenses decreased 6% to $25.32 million from $26.81 million for the first nine months of fiscal 2019.  The fiscal year-to-date decrease in operating expenses was primarily due to a $965,000 decrease in data processing and telecommunication expense and smaller decreases in several other categories.  Data processing and telecommunication expense was higher in the prior fiscal year primarily due to expenses associated with the Company's core operating system conversions.  The efficiency ratio for the first nine months of fiscal 2020 improved to 49.81% from 54.98% for the first nine months of fiscal 2019.

The provision for income taxes for the current quarter increased $238,000 to $1.46 million from $1.23 million for the preceding quarter, primarily due to higher income before income taxes.  Timberland's effective income tax rate was 19.1% for the quarter ended June 30, 2020, compared to 19.5% for the quarter ended March 31, 2020.  The fiscal year-to-date provision for income taxes increased $142,000 to $4.40 million for the first nine months of fiscal 2020 from $4.26 million for the first nine months of fiscal 2019.  Timberland's effective income tax rate for the nine months ended June 30, 2020 was 19.7% compared to 19.4% for the nine months ended June 30, 2019. 

Balance Sheet Management

Total assets increased $274.33 million, or 22%, to $1.52 billion at June 30, 2020 from $1.25 billion one year ago and increased $198.54 million, or 15%, from $1.32 billion at March 31, 2020.  The quarterly increase in asset size was primarily due to increases in net loans receivable and total cash and cash equivalents.  The increase in total assets was funded primarily by an increase in total deposits.

Loans
Net loans receivable increased $138.78 million, or 16%, to $1.01 billion at June 30, 2020 from $873.98 million one year ago and increased $105.10 million, or 12%, from $907.66 million at March 31, 2020.  The increase during the current quarter was primarily due to $122.58 million in PPP loans that were added to the portfolio, an $11.18 million increase in commercial real estate loans, and a $2.49 million increase in construction loans.  These increases were partially offset by a $10.31 million increase in the undisbursed portion of construction loans in process, a $4.77 million decrease in one- to four-family mortgage loans, a $4.57 million decrease in home equity and second mortgage loans, a $4.03 million increase in deferred loan origination fees, a $2.32 million decrease in land loans, and smaller decreases in several other loan categories.


Loan Portfolio
($ in thousands)

  June 30, 2020   March 31, 2020   June 30, 2019
  Amount   Percent   Amount   Percent   Amount   Percent
                       
Mortgage loans:                      
  One- to four-family (a) $   120,514     11 %   $   125,285       13 %   $  129,050     13 %
  Multi-family     79,468     7         81,298       8          70,374       7  
  Commercial     455,454     40         444,276       44         418,778       43  
  Construction - custom and owner/builder     134,709     12         119,175     12         130,516       13  
  Construction - speculative one-to four-family     12,136     1         14,679       1         18,165       2  
  Construction - commercial     33,166     3         37,446       4         41,805       4  
  Construction - multi-family     27,449     2         34,026       3         29,400       3  
  Construction - land development     6,132     1          5,774       1         3,047       1  
  Land     27,009     3         29,333       3         26,653       3  
Total mortgage loans     896,037     80         891,292       89         867,788       89  
                       
Consumer loans:                      
  Home equity and second mortgage     34,405     3         38,972       4         42,204       4  
  Other     3,552     --         3,829       --         4,450       1  
Total consumer loans     37,957     3         42,801       4         46,654       5  
                       
Commercial loans                      
  Commercial business loans     71,586     6         73,622       7         65,185       6  
  SBA PPP loans     122,581     11         --        --         --       --  
  Total commercial loans     194,167     17         73,622       7         65,185       6  
Total loans   1,128,161     100 %     1,007,715     100 %       979,627     100 %
Less:                      
Undisbursed portion of construction loans in process   (95,785 )         (85,474 )           (93,176 )    
Deferred loan origination fees   (6,723 )         (2,694 )           (2,838 )    
Allowance for loan losses   (12,894 )         (11,890 )           (9,631 )    
Total loans receivable, net $  1,012,759         $   907,657         $ 873,982      

_______________________
(a)     Does not include one- to four-family loans held for sale totaling $9,837, $5,798 and $3,338 at June 30, 2020, March 31, 2020 and June 30, 2019, respectively. 


The following table highlights eight commercial real estate ("CRE") segments generally presumed to have the potential to be more adversely affected by work at home and COVID related social distancing practices than other segments of the loan portfolio.  

CRE Portfolio Breakdown by Collateral
($ in thousands)

 

Collateral Type
   

 Amount
  Percent
of CRE
Portfolio
  Percent of
Total Loan
Portfolio
Office buildings   $    78,967      17 %      7 %
Medical/dental offices     53,375      12        5  
Other retail buildings     41,535      9        4  
Hotels/motels     28,551      6        2  
Restaurants     26,023      6        2  
Nursing homes     19,295      4        2  
Shopping centers     14,542      3        1  
Churches     11,830     3       1  
Additional CRE     181,336      40        16  
  Total CRE   $  455,454      100 %     40 %

Within Timberland's commercial business loan portfolio (non-CRE) resides a segment of restaurant loans totaling $19.35 million in outstanding balances at June 30, 2020.  As additional security for these loans, Timberland holds cash collateral of 25% of the segment's associated outstanding loan balances.  Unless prior arrangements are made, and Timberland consents, loans falling more than four weeks delinquent are eligible for purchase from Timberland's portfolio in accordance with a Marketing and Servicing Agreement in existence since March 6, 2014.  As an accommodation, Timberland has agreed to temporarily extend the purchase requirement to 12 weeks before a purchase is required from the portfolio.  An additional fourteen commercial business loans with aggregate balances of $2.73 million support restaurants and coffee stand operations and eight of these loans, with balances totaling $2.38 million, are associated with U.S. Small Business Administration ("SBA") guarantees.

Timberland originated $250.01 million in loans during the quarter ended June 30, 2020, compared to $83.30 million for the comparable quarter one year ago and $100.47 million for the preceding quarter.  The increase in loan production for the current quarter was primarily due to PPP loan originations ($122.58 million) and an increase in the origination of loans to refinance one-to four-family residential properties.  Timberland continues to sell fixed-rate one- to four-family mortgage loans into the secondary market for asset-liability management purposes and to generate non-interest income.  Timberland also periodically sells the guaranteed portion of SBA loans.  During the current quarter, fixed-rate one- to four-family mortgage loans and SBA loans totaling $52.08 million were sold compared to $19.91 million for the comparable quarter one year ago and $27.49 million for the preceding quarter.  The increase in loan sales during the current quarter was primarily a result of increased refinance activity for one- to four-family loans due to the decrease in mortgage interest rates.
                                            
Timberland's investment securities and CDs held for investment decreased $16.01 million, or 10%, to $145.57 million at June 30, 2020, from $161.58 million at March 31, 2020.  The decrease was primarily due to CDs and investment securities that matured during the quarter.   

Timberland's liquidity continues to remain strong.  Liquidity, as measured by the sum of cash and cash equivalents, CDs held for investment, and available for sale investment securities, was 28.9% of total liabilities at June 30, 2020, compared to 25.6% at March 31, 2020, and 23.6% one year ago. 

Deposits
Total deposits increased $192.89 million, or 17%, during the current quarter to $1.32 billion at June 30, 2020, from $1.13 billion at March 31, 2020.  The quarterly increase consisted of a $110.77 million increase in non-interest-bearing demand account balances, a $44.83 million increase in NOW checking account balances, a $30.32 million increase in savings account balances, and a $16.24 million increase in money market account balances. These increases were partially offset by a $9.28 million decrease in certificates of deposit account balances.  The increase in deposits during the current quarter was primarily due to inflows from PPP loans and government stimulus checks, in addition to organic growth in customer relationships.

Deposit Breakdown
($ in thousands)

    June 30, 2020   March 31, 2020    June 30, 2019
    Amount   Percent   Amount   Percent   Amount   Percent
Non-interest-bearing demand   $ 427,102     32 %   $ 316,328     28 %   $ 287,552     27 %
NOW checking     352,999   27       308,165   27       302,390   28  
Savings     212,645   16       182,321   16       163,560   15  
Money market     150,611   12       133,839   12       146,132   14  
Money market – reciprocal     11,257   1       11,794   1       8,708   1  
Certificates of deposit under $250     131,980   10       138,906   13       136,693   13  
Certificates of deposit $250 and over     31,946   2       31,088   3       26,301   2  
Certificates of deposit – brokered     --   --       3,207   --       1,199   --  
  Total deposits   $ 1,318,540   100 %   $ 1,125,648   100 %   $ 1,072,535   100 %

FHLB Borrowings
Timberland borrowed $10.00 million from the FHLB for asset-liability purposes in March 2020 as long-term borrowing rates dropped to historic lows.  The borrowings are comprised of a $5.00 million five-year borrowing and a $5.00 million seven-year borrowing.  The weighted average interest rate on these borrowings is 1.15%.

Shareholders' Equity and Capital Ratios
Total shareholders' equity increased $4.80 million to $182.81 million at June 30, 2020, from $178.01 million at March 31, 2020.  The increase in shareholders' equity was primarily due to net income of $6.21 million for the quarter, which was partially offset by the payment of $1.66 million in dividends to shareholders.  There were no shares repurchased during the quarter as Timberland temporarily suspended its existing stock repurchase plan on March 16, 2020 as a result of the COVID-19 pandemic.

Timberland remains well capitalized with a total risk-based capital ratio of 20.65% and a Tier 1 leverage capital ratio of 11.55% at June 30, 2020.

Asset Quality and Loan Deferrals

Timberland's non-performing assets to total assets ratio improved to 0.31% at June 30, 2020 from 0.43% one year ago and 0.38% at March 31, 2020.  There were net recoveries of $4,000 for the current quarter compared to net recoveries of $8,000 for the preceding quarter and net charge-offs of $110,000 for the comparable quarter one year ago. 

A $1.00 million provision for loan losses was made during the current quarter due to continued economic uncertainties associated with the COVID-19 pandemic.  On March 24, 2020, Washington State Governor Jay Inslee signed a statewide order requiring residents to stay at home unless involved in an essential activity.  All businesses, except those considered essential were also ordered to close.  As a result of the mandated shutdown, Timberland began working with loan customers on loan deferral and forbearance plans.  Through June 30, 2020, Timberland had made 90-day payment deferrals (with interest continuing to accrue or be paid monthly) for 209 loans with balances aggregating to $135.83 million.  The following table details the COVID-19 loan modifications as of June 30, 2020:


COVID-19 Loan Modifications
            ($ in thousands)

 

 
Industry / Collateral Type
   

 
Amount
   

Percent of
Total Loans
Retail   $   21,648     1.9 %
Real estate rental and leasing     21,335   1.9  
Medical     19,951   1.8  
Other commercial     18,584   1.6  
Hotels     18,101   1.6  
Construction     16,994   1.5  
Restaurants     14,825   1.3  
One- to four-family mortgage     2,991   0.3  
Industrial     1,033   0.1  
Land     361   --  
Other consumer     10   --  
  Total loan modifications   $   135,833    12.0 %
 

The ALL as a percentage of loans receivable was 1.26% at June 30, 2020 compared 1.09% one year ago and 1.29% at March 31, 2020.  Even though the total ALL increased during the current quarter, the ALL as a percentage of loans receivable decreased, primarily as a result of adding PPP loans totaling $122.58 million to the loan portfolio.  These PPP loans are 100% SBA guaranteed and, therefore, not factored into the Company's normal ALL calculation.  The ALL to loans receivable (excluding PPP loans) at June 30, 2020 was 1.43% (non-GAAP).

The ALL as a percentage of loans receivable is also impacted by the loans acquired in the South Sound Acquisition.  Included in the recorded value of loans acquired in acquisitions are net discounts which may reduce the need for an allowance for loan losses on such loans because they are carried at an amount below their outstanding principal balance.  The initial recorded value of loans acquired in the South Sound Acquisition was $123.62 million and the related fair value discount was $2.08 million, or 1.68% of the loans acquired.  The remaining fair value discount on loans acquired in the South Sound Acquisition was $963,000 at June 30, 2020.  The allowance for loan losses to loans receivable (excluding the remaining balance of the loans acquired in the South Sound Acquisition and PPP loans) was 1.55% (non-GAAP) at June 30, 2020.

The following table details the ALL as a percentage of loans receivable:

    June 30,   March 31,   June 30,
    2020    2020    2019 
ALL to loans receivable    1.26 %   1.29 %   1.09 %
ALL to loans receivable (excluding PPP loans) (non-GAAP)   1.43 %   1.29 %   1.09 %
ALL to loans receivable (excluding PPP loans and South Sound Acquisition loans) (non-GAAP)   1.55 %   1.42 %   1.23 %

Total delinquent loans (past due 30 days or more) and non-accrual loans increased $32,000, or 1%, to $3.55 million at June 30, 2020, from $3.52 million one year ago, and increased $120,000, or 4%, from $3.52 million at March 31, 2020.  Non-accrual loans decreased $335,000, or 10%, to $3.02 million at June 30, 2020 from $3.35 million one year ago and decreased $201,000, or 6%, from $3.22 million at March 31, 2020.


Non-Accrual Loans
($ in thousands)

  June 30, 2020   March 31, 2020   June 30, 2019
  Amount   Quantity   Amount   Quantity   Amount   Quantity
Mortgage loans:                      
  One- to four-family $ 927   5   $ 941   5   $ 723   4
  Commercial   875   3     947   3     836   2
  Land   185   2     193   2     422   4
  Total mortgage loans   1,987   10     2,081   10     1,981   10
                       
Consumer loans                      
  Home equity and second mortgage   586   7     581   6     606   6
  Other   10   1     11   1     14   1
  Total consumer loans   596   8     592   7     620   7
                       
Commercial business loans   432    6     543   8     749   10
Total loans $ 3,015   24   $ 3,216   25   $ 3,350   27
 

OREO and other repossessed assets decreased 15% to $1.47 million at June 30, 2020, from $1.72 million at June 30, 2019, and decreased 10% from $1.62 million at March 31, 2020.  At June 30, 2020, the OREO and other repossessed asset portfolio consisted of eight individual land parcels.  During the quarter ended June 30, 2020, two OREO properties were sold, resulting in a $6,000 loss.


OREO and Other Repossessed Assets
($ in thousands)

  June 30, 2020   March 31, 2020   June 30, 2019
  Amount   Quantity   Amount   Quantity   Amount   Quantity
Commercial $    --   --   $   --   --   $   186   2
Land   1,466   8     1,623   10     1,533   11
Total $ 1,466   8   $ 1,623   10   $ 1,719   13
 

Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles ("GAAP"), this press release contains certain non-GAAP financial measures.  Timberland believes that certain non-GAAP financial measures provide investors with information useful in understanding the Company's financial performance; however, readers of this report are urged to review these non-GAAP financial measures in conjunction with GAAP results as reported.

Financial measures that exclude intangible assets are non-GAAP measures.  To provide investors with a broader understanding of capital adequacy, Timberland provides non-GAAP financial measures for tangible common equity, along with the GAAP measure.  Tangible common equity is calculated as shareholders' equity less goodwill and CDI.  In addition, tangible assets equal total assets less goodwill and CDI.

The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible shareholders' equity (non-GAAP) and ending total assets (GAAP) to ending tangible assets (non-GAAP).

($ in thousands)   June 30, 2020   March 31, 2020   June 30, 2019
             
Shareholders' equity   $   182,806     $   178,008     $   166,269  
Less goodwill and CDI     (16,858 )     (16,959 )     (17,275 )
Tangible common equity   $    165,948     $   161,049     $  148,994  
             
Total assets   $   1,521,642     $   1,323,101     $   1,247,310  
Less goodwill and CDI     (16,858 )     (16,959 )     (17,275 )
Tangible assets   $   1,504,784     $   1,306,142     $   1,230,035  
 

Acquisition of South Sound Bank
On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Acquisition").  The Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into Timberland Bank and the Company.  Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share of the Company's common stock and $5.68825 in cash per share of South Sound Bank common stock.  The Company issued 904,826 shares of its common stock (valued at $28,267,000 based on the Company's closing stock price on September 30, 2018 of $31.24 per share) and paid $6,903,000 in cash in the transaction for total consideration paid of $35,170,000. 

About Timberland Bancorp, Inc.
Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank ("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 branches (including its main office in Hoquiam).    

Disclaimer
Certain matters discussed in this press release 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, plan, 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 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 expected cost savings, synergies and other financial benefits from our acquisition of South Sound Bank might not be realized within the expected time frames or at all; the integration of the combined company, including personnel changes/retention, might not proceed as planned; and the combined company might not perform as well as expected; 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 assets 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; 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 and our bank subsidiary by the Federal Deposit Insurance Corporation, 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 risk associated with the loans on our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce 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 successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; 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 and 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 Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; natural disasters; pandemics such as COVID-19; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks detailed in our reports filed with the Securities and Exchange Commission.

Any of the forward-looking statements that we make in this press release 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 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 2020 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.

 
TIMBERLAND BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended
($ in thousands, except per share amounts)   June 30,   March 31,   June 30,
(unaudited)    2020    2020     2019
  Interest and dividend income            
  Loans receivable   $ 12,871   $ 12,823     $ 12,459
  Investment securities     345     489       339
  Dividends from mutual funds, FHLB stock and other investments     23     35       43
  Interest bearing deposits in banks     429     784       1,344
    Total interest and dividend income     13,668     14,131       14,185
               
  Interest expense            
  Deposits     1,159     1,243       1,248
  Borrowings     29     8       --
    Total interest expense     1,188     1,251       1,248
    Net interest income     12,480     12,880       12,937
  Provision for loan losses     1,000     2,000       --
    Net interest income after provision for loan losses     11,480     10,880       12,937
               
  Non-interest income            
  Service charges on deposits     858     1,078       1,175
  ATM and debit card interchange transaction fees     1,069     1,015       1,090
  Gain on sale of loans, net     2,141     736       520
  Bank owned life insurance ("BOLI") net earnings     148     147       188
  Servicing income on loans sold     35     62       110
  Gain on sale of investment securities, net     --     --       47
  Recoveries on investment securities, net       6       3         14
  Other     598     639       394
    Total non-interest income     4,855     3,680       3,538
               
  Non-interest expense            
  Salaries and employee benefits     4,570     4,621       4,501
  Premises and equipment     1,077     943       998
  Loss (gain) on disposition of premises and equipment, net     4     (3 )     --
  Advertising     150     159       177
  OREO and other repossessed assets, net     11     51       145
  ATM and debit card processing     405     359       364
  Postage and courier     137     145       131
  State and local taxes     255     233       237
  Professional fees     286     210       267
  FDIC insurance expense     143     --       72
  Loan administration and foreclosure     191     78       73
  Data processing and telecommunications     603     515       987
  Deposit operations     245     274       391
  Amortization of CDI     101     102       120
  Other, net     483     599       504
    Total non-interest expense, net     8,661     8,286       8,967
               
  Income before income taxes     7,674     6,274       7,508
  Provision for income taxes     1,463     1,225       1,552
    Net income   $   6,211   $   5,049     $   5,956
               
  Net income per common share:            
     Basic   $ 0.75   $ 0.61     $ 0.71
    Diluted     0.74     0.60       0.70
               
  Weighted average common shares outstanding:            
    Basic     8,309,947     8,344,201       8,338,637
    Diluted     8,378,983     8,456,659       8,482,360
                       
                       
TIMBERLAND BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
  Nine Months Ended
($ in thousands, except per share amounts)   June 30,   June 30,
(unaudited)    2020     2019
  Interest and dividend income        
  Loans receivable   $ 38,457     $ 36,457
  Investment securities     1,274       915
  Dividends from mutual funds, FHLB stock and other investments     95       121
  Interest bearing deposits in banks     2,164       3,849
    Total interest and dividend income     41,990       41,342
           
  Interest expense        
  Deposits     3,591       3,332
  Borrowings     37       --
    Total interest expense     3,628       3,332
    Net interest income     38,362       38,010
  Provision for loan losses     3,200       --
    Net interest income after provision for loan losses     35,162       38,010
           
  Non-interest income        
  Service charges on deposits     3,136       3,581
  ATM and debit card interchange transaction fees     3,178       2,896
  Gain on sale of loans, net     3,829       1,194
  Bank owned life insurance ("BOLI") net earnings     442       1,502
  Servicing income on loans sold     148       375
  Gain on sale of investment securities, net     --       47
  Recoveries on investment securities, net       113         34
  Other     1,627       1,115
    Total non-interest income     12,473       10,744
           
  Non-interest expense        
  Salaries and employee benefits     13,913       13,974
  Premises and equipment     2,914       2,946
  Loss (gain) on disposition of premises and equipment, net     (98 )     8
  Advertising     493       543
  OREO and other repossessed assets, net     60       247
  ATM and debit card processing     1,203       1,174
  Postage and courier     416       379
  State and local taxes     705       642
  Professional fees     766       687
  FDIC insurance expense     116       243
  Loan administration and foreclosure     358       244
  Data processing and telecommunications     1,702       2,667
  Deposit operations     836       1,049
  Amortization of CDI     305       339
  Other, net     1,630       1,665
    Total non-interest expense, net     25,319       26,807
           
  Income before income taxes     22,316       21,947
  Provision for income taxes     4,404       4,262
    Net income   $   17,912     $   17,685
           
           
  Net income per common share:        
     Basic   $ 2.15     $ 2.13
    Diluted     2.12       2.09
           
  Weighted average common shares outstanding:        
    Basic     8,331,908       8,313,913
    Diluted     8,437,030       8,468,212
                 


TIMBERLAND BANCORP INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
($ in thousands, except per share amounts) (unaudited)   June 30,   March 31,   June 30,
      2020       2020       2019  
Assets            
Cash and due from financial institutions   $ 24,691     $   22,862     $   24,169  
Interest-bearing deposits in banks     246,953       145,286       146,666  
  Total cash and cash equivalents     271,644       168,148       170,835  
               
Certificates of deposit ("CDs") held for investment, at cost     72,014       82,472       81,184  
Investment securities:            
  Held to maturity, at amortized cost     30,660       36,667       37,645  
  Available for sale, at fair value     42,891       42,439       2,979  
FHLB stock     1,922       1,922       1,437  
Other investments, at cost     3,000       3,000       3,000  
Loans held for sale     9,837       5,798       3,338  
             
Loans receivable     1,025,653       919,547       883,613  
Less: Allowance for loan losses     (12,894 )     (11,890 )     (9,631 )
  Net loans receivable     1,012,759       907,657       873,982  
               
Premises and equipment, net     23,119       23,072       23,090  
OREO and other repossessed assets, net     1,466       1,623       1,719  
BOLI     21,447       21,299       20,866  
Accrued interest receivable     4,614       3,595       3,759  
Goodwill     15,131       15,131       15,131  
CDI     1,727       1,828       2,144  
Servicing rights, net     3,073       2,724       2,372  
Operating lease right-of-use assets     2,662       2,759       --  
Other assets     3,676       2,967       3,829  
  Total assets   $ 1,521,642     $ 1,323,101     $ 1,247,310  
               
Liabilities and shareholders' equity            
Deposits: Non-interest-bearing demand   $   427,102     $   316,328     $   287,552  
Deposits: Interest-bearing     891,438       809,320       784,983  
  Total deposits     1,318,540       1,125,648       1,072,535  
               
Operating lease liabilities     2,695       2,759       --  
FHLB borrowings     10,000       10,000       --  
Other liabilities and accrued expenses     7,601       6,686       8,506  
  Total liabilities     1,338,836       1,145,093       1,081,041  
             
Shareholders' equity            
Common stock, $.01 par value; 50,000,000 shares authorized;
8,310,793 shares issued and outstanding – June 30, 2020
8,309,193 shares issued and outstanding – March 31, 2020
8,340,928 shares issued and outstanding – June 30, 2019   
     

 
42,352
       

 
42,258
       

 
43,398
 
Retained earnings     140,478       135,929       122,904  
Accumulated other comprehensive loss     (24 )     (179 )     (33 )
  Total shareholders' equity     182,806       178,008       166,269  
  Total liabilities and shareholders' equity   $ 1,521,642     $ 1,323,101     $ 1,247,310  


   

KEY FINANCIAL RATIOS AND DATA 
Three Months Ended
($ in thousands, except per share amounts) (unaudited)   June 30,   March 31,   June 30,
      2020       2020       2019  
PERFORMANCE RATIOS:            
Return on average assets (a)     1.70 %     1.56 %     1.93 %
Return on average equity (a)     13.83 %     11.39 %     14.56 %
Net interest margin (a)     3.63 %     4.27 %     4.49 %
Efficiency ratio     49.96 %     50.04 %     54.43 %
             
    Nine Months Ended
    June 30,
2020
      June 30,
2019
PERFORMANCE RATIOS:            
Return on average assets (a)     1.79 %         1.94 %
Return on average equity (a)     13.53 %         14.86 %
Net interest margin (a)     4.08 %         4.49 %
Efficiency ratio     49.81 %         54.98 %
             
    June 30,   March 31,   June 30,
      2020       2020       2019  
ASSET QUALITY RATIOS AND DATA:            
Non-accrual loans   $ 3,015     $ 3,216     $ 3,350  
Loans past due 90 days and still accruing     --       --       --  
Non-performing investment securities     228       238       303  
OREO and other repossessed assets     1,466       1,623       1,719  
Total non-performing assets (b)   $ 4,709     $ 5,077     $ 5,372  
             
Non-performing assets to total assets (b)     0.31 %     0.38 %     0.43 %
Net charge-offs (recoveries) during quarter   $    (4 )   $   (8 )   $   110  
ALL to non-accrual loans     428 %     370 %     287 %
ALL to loans receivable (c)     1.26 %     1.29 %     1.09 %
ALL to loans receivable (excluding PPP loans) (d) (non-GAAP)     1.43 %     1.29 %     1.09 %
ALL to loans receivable (excluding PPP loans and South Sound  Acquisition loans) (d) (e) (non-GAAP)      1.55 %      1.42 %      1.23 %
Troubled debt restructured loans on accrual status (f)   $ 2,876     $ 2,877     $ 2,916  
             
CAPITAL RATIOS:            
Tier 1 leverage capital     11.55 %     12.75 %     12.32 %
Tier 1 risk-based capital     19.39 %     18.53 %     17.74 %
Common equity Tier 1 risk-based capital       19.39 %     18.53 %     17.74 %
Total risk-based capital     20.65 %     19.78 %     18.91 %
Tangible common equity to tangible assets (non-GAAP)     11.03 %     12.33 %     12.11 %
             
BOOK VALUES:            
Book value per common share   $   22.00      $   21.42      $ 19.93  
Tangible book value per common share (g)     19.97       19.38       17.86  

________________________________________________

(a)  Annualized
(b)  Non-performing assets include non-accrual loans, loans past due 90 days and still accruing, non-performing investment securities and OREO and other repossessed assets.  Troubled debt restructured loans on accrual status are not included.
(c)  Does not include loans held for sale and is before the allowance for loan losses.
(d)  Does not include PPP loans totaling $122,581, $0 and $0 at June 30, 2020, March 31, 2020 and June 30, 2019, respectively.
(e)  Does not include loans acquired in the South Sound Acquisition totaling $73,084, $80,619, and $98,579 at June 30, 2020, March 31, 2020 and June 30, 2019, respectively.
(f)  Does not include troubled debt restructured loans totaling $207, $343 and $292 reported as non-accrual loans at June 30, 2020, March 31, 2020 and June 30, 2019 respectively.
(g)  Tangible common equity divided by common shares outstanding (non-GAAP).     

                                                                                      

AVERAGE BALANCES, YIELDS, AND RATES - QUARTERLY
($ in thousands)
(unaudited)

 
  For the Three Months Ended 
  June 30, 2020  March 31, 2020  June 30, 2019 
  Amount   Rate   Amount   Rate   Amount     Rate
                       
Assets                      
Loans receivable and loans held for sale $    1,015,966     5.07 %   $   922,011     5.56 %   $   886,460     5.62 %
Investment securities and FHLB stock (1)   81,086      1.82       81,925      2.56         47,677      3.21  
Interest-earning deposits in banks and CDs     278,158      0.62         203,936      1.54         219,070      2.45  
  Total interest-earning assets     1,375,210      3.97         1,207,872      4.68         1,153,207      4.92  
Other assets     87,905             85,226             82,113      
  Total assets $   1,463,115         $   1,293,098         $   1,235,320      
                       
Liabilities and Shareholders' Equity                      
NOW checking accounts $     332,502      0.26 %   $     303,403      0.31 %   $     300,330      0.30 %
Money market accounts     156,537      0.47         143,817      0.58         154,238      0.82  
Savings accounts   199,054      0.11       178,688      0.12       163,122      0.07  
Certificates of deposit accounts   168,368      1.68       169,293      1.78       162,237      1.68  
  Total interest-bearing deposits   856,461      0.54       795,201      0.63       779,927      0.64  
Borrowings   10,000      1.17       2,747      1.17       --     --  
  Total interest-bearing liabilities   866,461      0.55       797,948      0.63       779,927      0.64  
                       
Non-interest-bearing demand deposits   406,396           306,907           288,308      
Other liabilities     10,684             10,982           3,405      
Shareholders' equity   179,574           177,261           163,680      
  Total liabilities and shareholders' equity $   1,463,115         $   1,293,098         $   1,235,320      
                       
  Interest rate spread     3.42 %       4.05 %       4.28 %
  Net interest margin (2)     3.63 %       4.27 %       4.49 %
  Average interest-earning assets to average interest-bearing liabilities   158.72 %         151.37 %         147.86 %    

_______________________________________
 (1) Includes other investments
 (2) Net interest margin = annualized net interest income / average interest-earning assets
               


AVERAGE BALANCES, YIELDS, AND RATES – YEAR-TO-DATE
($ in thousands)
(unaudited)

 
  For the Nine Months Ended
  June 30, 2020         June 30, 2019
  Amount   Rate         Amount     Rate
                     
Assets                    
Loans receivable and loans held for sale $   949,822      5.40 %         $   874,943      5.56 %
Investment securities and FHLB Stock (1)     76,282       2.39               41,972       3.29  
Interest-earning deposits in banks and CD's     226,129       1.28               212,785       2.41  
  Total interest-earning assets     1,252,233       4.47               1,129,700       4.88  
Other assets     85,405                   86,616      
  Total assets $   1,337,638               $   1,216,316      
                     
Liabilities and Shareholders' Equity                    
NOW checking accounts $   310,717      0.29 %         $   289,926      0.29 %
Money market accounts     144,663       0.54               156,538       0.73  
Savings accounts   184,076       0.10             162,136       0.07  
Certificate of deposit accounts   168,148       1.75             157,688       1.50  
  Total interest-bearing deposits     807,604       0.59               766,288       0.58  
Borrowings   4,234       1.17             --     --  
Total interest-bearing liabilities   811,838       0.60             766,288       0.58  
                     
Non-interest-bearing demand deposits   339,460                 288,624      
Other liabilities   9,823                 2,681      
Shareholders' equity   176,517                 158,723      
  Total liabilities and shareholders' equity $   1,337,638               $   1,216,316      
                     
  Interest rate spread     3.87 %             4.30 %
  Net interest margin (2)     4.08 %             4.49 %
  Average interest-earning assets to average interest-bearing liabilities   154.25 %               147.42 %    

_____________________________________
 (1) Includes other investments
 (2) Net interest margin = annualized net interest income / average interest-earning assets

     
  Contact:   Michael R. Sand,
    President & CEO
    Dean J. Brydon, CFO
    (360) 533-4747
    www.timberlandbank.com

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