• Reports 10th Consecutive Year of Increased Net Income and Earnings per Share
  • Loan Deferrals Decreased to Less Than 1% of Loan Portfolio
  • Fiscal Year Diluted Earnings per Share Increases to $2.88
  • Fiscal Year Return on Average Assets of 1.75%
  • Fiscal Year Return on Average Equity of 13.59%
  • Announces $0.20 Quarterly Cash Dividend
  • Announces Plans to Resume Purchases Under Existing Stock Repurchase Program

HOQUIAM, Wash., Oct. 29, 2020 (GLOBE NEWSWIRE) -- Timberland Bancorp, Inc. (NASDAQ: TSBK) (“Timberland” or “the Company”) today reported net income increased 1% to $24.27 million for the fiscal year ended September 30, 2020 from $24.02 million for the fiscal year ended September 30, 2019. Earnings per diluted common share (“EPS”) increased 1% to $2.88 for the 2020 fiscal year from $2.84 for the 2019 fiscal year.

Timberland also reported quarterly net income of $6.36 million, or $0.76 per diluted common share, for the quarter ended September 30, 2020. This compares to net income of $6.21 million, or $0.74 per diluted common share, for the preceding quarter and net income of $6.33 million, or $0.75 per diluted common share, for the quarter ended September 30, 2019.

Timberland’s Board of Directors declared a quarterly cash dividend to shareholders of $0.20 per common share payable on November 27, 2020, to shareholders of record on November 13, 2020.

“We are pleased to report record net income for our fiscal year ended September 30, 2020 and, for the tenth consecutive year, increased net income and earnings per share,” stated Michael Sand, President and CEO. “Net loans outstanding increased 14% for the year primarily as a result of Timberland’s commitment to serving applicants seeking economic relief through the Paycheck Protection Program (“PPP”). Deposit growth, year over year, trended well above average increasing nearly 27% primarily as a result of PPP loan proceeds being placed on deposit, organic growth in customer relationships and depositors opting to build liquidity in the midst of an uncertain economic environment. The result for Timberland was a significant increase in on balance sheet liquidity. Given continuing uncertainties regarding the economy and the interest rate environment we will continue with our measured approach to investing a significant portion of this excess liquidity.”

“We remain committed to our borrowers whom have been affected by COVID related declines in business revenues,” Sand continued. “At June 30th, we had approved deferrals for 209 loans representing balances aggregating to approximately 13% of the Bank’s net loan portfolio. We are pleased to report at September 30th that loans remaining in a deferred payment status had decreased to less than 1% of net loans outstanding.”

“In September 2020, we were honored for the second consecutive year to be included in the prestigious Piper Sandler Bank and Thrift Sm-All Stars: Class of 2020, which identified Timberland Bank as one of the 35 top performing, publicly traded small-cap banks and thrifts in the nation based on growth, profitability, credit quality and capital strength. In May 2020, we were awarded, for the third consecutive year, the Raymond James Community Bankers Cup, which recognized the top 10% of community banks in the country based on profitability, operational efficiency and various balance sheet metrics. Being recognized once again for both of these awards is great affirmation of our extraordinary staff and their commitment to supporting our customers and communities,” said Sand. “After temporarily suspending our existing stock repurchase plan in March as a result of the pandemic, we plan to resume purchasing stock in November under the terms of our existing stock repurchase, subject to market conditions. We believe our stock is an attractive investment,” Sand concluded. The Company has 144,852 shares available to be repurchased under its existing stock repurchase plan.

2020 Fiscal Year Earnings and Balance Sheet Highlights (at or for the period ended September 30, 2020, compared to September 30, 2019 or June 30, 2020):

Earnings Highlights:

  • Net income increased to $24.27 million for the 2020 fiscal year from $24.02 million for the 2019 fiscal year; EPS increased to $2.88 for the 2020 fiscal year from $2.84 for the 2019 fiscal year;
  • Net income increased to $6.36 million for the current quarter from $6.21 million for the preceding quarter and $6.33 million for the comparable quarter one year ago; EPS increased to $0.76 for the current quarter from $0.74 for the preceding quarter and $0.75 for the comparable quarter one year ago;
  • Return on average equity (“ROE”) and return on average assets (“ROA”) for the 2020 fiscal year were 13.59% and 1.75%, respectively; ROE and ROA for the current quarter were 13.78% and 1.65%, respectively;
  • Net interest margin was 3.90% for the 2020 fiscal year and 3.44% for the current quarter; and
  • The efficiency ratio improved to 50.04% for the 2020 fiscal year from 54.32% for the 2019 fiscal year.

Balance Sheet Highlights:

  • Total assets increased 26% year-over-year and 3% from the prior quarter;
  • Total deposits increased 27% year-over-year and 3% from the prior quarter;
  • Net loans receivable increased 14% year-over-year and increased slightly from the prior quarter; and
  • Book and tangible book (non-GAAP) values per common share increased to $22.58 and $20.56, respectively, at September 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 $67.95 million for the 2020 fiscal year from $64.37 million for the 2019 fiscal year. For the current quarter, operating revenue increased 3% to $17.23 million from $16.72 million for the comparable quarter one year ago and decreased 1% from $17.33 million for the preceding quarter.

Net interest income for the 2020 fiscal year decreased 1% to $50.88 million from $51.16 million for the 2019 fiscal year. The year-over-year decrease was primarily due to a 64 basis point decrease in the average yield on interest-earning assets, which was partially offset by a $166.51 million increase in the average balance of interest-earning assets. Timberland’s net interest margin (“NIM”) for the fiscal year ended September 30, 2020 was 3.90% compared to 4.50% for the fiscal year ended September 30, 2019.

Net interest income increased slightly to $12.52 million for the current quarter from $12.48 million for the preceding quarter and decreased 5% from $13.15 million for the comparable quarter one year ago.   Timberland’s NIM for the current quarter was 3.44% compared to 3.63% for the preceding quarter and 4.54% 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 $173,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $181,000 in pre-payment penalties, non-accrual interest, and late fees. The NIM for the preceding 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 comparable quarter one year ago was increased by approximately 12 basis points due to the accretion of $188,000 of the fair value discount on loans acquired in the South Sound Acquisition and the collection of $158,000 in pre-payment penalties, non-accrual interest and late fees.  

The NIM compression during the current quarter and current fiscal year 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 current quarter and current fiscal year as deposit balances increased more than did the loan portfolio. As a result, average interest-earning deposits in banks and CDs increased $61.07 million, or 22%, to $339.22 million for the quarter ended September 30, 2020 from $278.16 million for the quarter ended June 30, 2020 and increased $119.66 million, or 54%, from $219.57 million for the quarter ended September 30, 2019. Through September 30, 2020, Timberland originated $126.82 million in PPP loans 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 September 30, 2020, Timberland recorded $316,000 in interest income on PPP loans and accreted $599,000 in PPP loan origination fees into income. At September 30, 2020, Timberland had $3.72 million in PPP deferred loan origination fees remaining to be accreted into interest income during the remaining life of the loans.   

Provisions for loan losses of $3.70 million were made during the 2020 fiscal year compared to no provision made for loan losses in the 2019 fiscal year. A $500,000 provision for loan losses was made during the current quarter compared to a $1.00 million provision for loan losses for the preceding quarter and no provision for loan losses for the comparable quarter one year ago. This fiscal year’s provisions for loan losses were primarily due to economic uncertainties associated with the COVID-19 pandemic. As a result of these provisions and net recoveries during the year, Timberland’s allowance for loan losses (“ALL”) increased by 38% to $13.41 million at September 30, 2020 from $9.69 million at September 30, 2019.

Non-interest income for the 2020 fiscal year increased $2.85 million, or 20%, to $17.19 million from $14.34 million for the 2019 fiscal year. The increase was primarily due to a $4.23 million increase in gain on sales of loans, recoveries of $483,000 of previously charged off receivables acquired in the South Sound Acquisition (which are recorded in the “Other, net” non-interest category), and smaller increases in several other categories. These increases were partially offset by a $1.05 million decrease in BOLI net earnings, a $757,000 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 year and an increase in the average pricing margin. The increased mortgage banking volumes were largely due to increased refinance activity for single family homes due to lower mortgage interest rates. Net BOLI earnings were higher for the comparable period one year ago primarily due to a BOLI death benefit claim. The decrease in service charges on deposits was primarily due to a decrease in overdraft fee income.

Non-interest income increased 31% to $4.71 million for the current quarter from $3.60 million for the comparable quarter one year ago and decreased 3% from $4.86 million for the preceding quarter. The decrease in non-interest income compared to the preceding quarter was primarily due to a $197,000 valuation allowance on servicing rights and a $200,000 decrease in recoveries of previously charged off receivables acquired in the South Sound Acquisition (as discussed above). The valuation allowance on servicing rights was primarily the result of prepayment speeds increasing on mortgages being serviced in this low interest rate environment. Partially offsetting these decreases were increases in service charges on deposits (due to increased overdraft fee income) and debit card interchange transaction fee income (due to higher volumes).

For the 2020 fiscal year, total (non-interest) operating expenses decreased $1.52 million, or 4%, to $34.06 million from $35.58 million for the prior fiscal year. The decrease was primarily due to a $1.42 million decrease in data processing and telecommunications expense and smaller decreases in several other categories. Data processing related expenses were elevated in the 2019 fiscal year due to Timberland’s core operating system and ancillary technology systems conversions. The efficiency ratio for the 2020 fiscal year improved to 50.04% from 54.32% for the 2019 fiscal year.

Total operating expenses for the current quarter decreased $30,000 to $8.74 million from $8.77 million for the comparable quarter one year ago and increased $82,000, or 1%, from $8.66 million for the preceding quarter.   The increase in operating expenses compared to the preceding quarter was primarily due to a $204,000 increase in OREO expense and was partially offset by decreases in salaries and employee benefits expense and smaller decreases in several other categories. The increase in OREO expense was primarily due to a market value write-down on the Company’s largest remaining OREO property in conjunction with the acceptance of a purchase offer. The efficiency ratio for the current quarter was 50.73% compared to 52.39% for the comparable quarter one year ago and 49.96% for the preceding quarter.

The provision for income taxes for the 2020 fiscal year increased $137,000 to $6.04 million from $5.90 million for the 2019 fiscal year, primarily due to higher taxable income. Timberland’s effective income tax rate for the year ended September 30, 2020 was 19.9% compared to 19.7% for the year ended September 30, 2019. The provision for income taxes for the current quarter increased $172,000 to $1.64 million from $1.46 million for the preceding quarter, primarily due to higher taxable income.   Timberland’s effective income tax rate was 20.5% for the quarter ended September 30, 2020, compared to 19.1% for the quarter ended June 30, 2020.

Balance Sheet Management

Total assets increased $318.85 million, or 26%, to $1.57 billion at September 30, 2020 from $1.25 billion one year ago and increased $44.34 million, or 3%, from $1.52 billion at June 30, 2020. The year-over-year increase in asset size was primarily due to increases in total cash and cash equivalents and net loans receivable. The quarterly increase in asset size was primarily due to increases in total cash and cash equivalents and investment securities. The increases in total assets were funded primarily by increases in total deposits.

Loans

Net loans receivable increased $127.21 million, or 14%, to $1.014 billion at September 30, 2020 from $886.66 million one year ago. The increase was primarily due to a $126.82 million increase in PPP loans, a $34.58 million increase in commercial real estate loans, and smaller increases in several other categories. These increases were partially offset by a $14.08 million decrease in one- to four-family loans and smaller decreases in several other categories.

Net loans receivable increased slightly to $1.014 billion at September 30, 2020 from $1.013 billion at June 30, 2020. The increase during the current quarter was primarily due to a $5.56 million increase in multi-family loans, a $4.24 million in PPP loans, and smaller increases in several other categories.   These increases were partially offset by a $4.77 million increase in the undisbursed portion of construction loans in process and smaller changes in several other categories.

Loan Portfolio
($ in thousands)

 September 30, 2020 June 30, 2020 September 30, 2019
 Amount Percent Amount Percent Amount Percent
Mortgage loans:           
One- to four-family (a)$118,580  10% $120,514  11% $132,661  13%
Multi-family 85,053  8   79,468  7   76,036  8 
Commercial 453,574  40   455,454  40   419,117  42 
Construction - custom and owner/builder 129,572  12   134,709 12   128,848  13 
Construction - speculative one-to four-family 14,592  1   12,136  1   16,445  2 
Construction - commercial 33,144  3   33,166  3   39,566  4 
Construction - multi-family 34,476  3   27,449  2   36,263  4 
Construction - land           
Development 7,712  1   6,132  1   2,404  -- 
Land 25,571  2   27,009  3   30,770  3 
Total mortgage loans 902,274  80   896,037  80   882,110  89 
            
Consumer loans:           
Home equity and second Mortgage 32,077  3   34,405  3   40,190  4 
Other 3,572  --   3,552  --   4,312  -- 
Total consumer loans 35,649  3   37,957  3   44,502  4 
            
Commercial loans:           
Commercial business loans 69,540  6   71,586  6   64,764  7 
SBA PPP loans 126,820  11   122,581  11   --  -- 
Total commercial loans 196,360  17   194,167  17   64,764  7 
Total loans 1,134,283  100%  1,128,161  100%  991,376  100%
Less:           
Undisbursed portion of construction loans in process (100,558)    (95,785)    (92,226)  
Deferred loan origination fees (6,436)    (6,723)    (2,798)  
Allowance for loan losses (13,414)    (12,894)    (9,690)  
Total loans receivable, net$1,013,875    $1,012,759    $886,662   
                  

_______________________
(a)   Does not include one- to four-family loans held for sale totaling $4,509, $9,837 and $6,071 at September 30, 2020, June 30, 2020 and September 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 $76,732 17% 7%
Medical/dental offices  56,653 12  5 
Other retail buildings  40,725 9  4 
Hotels/motels  27,440 6  2 
Restaurants  25,481 6  2 
Nursing homes  19,194 4  2 
Shopping centers  14,483 3  1 
Churches  12,464 3  1 
Additional CRE  180,402 40  16 
Total CRE $453,574 100% 40%
          

Within Timberland’s commercial business loan portfolio (non-CRE) resides a segment of restaurant loans totaling $16.82 million in outstanding balances at September 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.  

Timberland originated $114.15 million in loans during the quarter ended September 30, 2020, compared to $96.41 million for the comparable quarter one year ago and $250.01 million for the preceding quarter. Loan originations for the preceding quarter were elevated due to the origination of $122.58 million in PPP loans. 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 totaling $46.85 million were sold compared to $19.77 million for the comparable quarter one year ago and $52.08 million for the preceding quarter. The increase in loan sales during the current fiscal year was primarily a result of increased refinance activity for one- to four-family mortgage loans due to the decrease in mortgage interest rates.

Timberland’s investment securities and CDs held for investment increased $6.3 million, or 4%, to $151.82 million at September 30, 2020, from $145.57 million at June 30, 2020. The increase was primarily due to the purchase of additional mortgage-backed investment securities which was partially offset by CDs 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 31.8% of total liabilities at September 30, 2020, compared to 28.9% at June 30, 2020, and 22.8% one year ago.  

Deposits

Total deposits increased $290.18 million, or 27%, during the fiscal year to $1.36 billion at September 30, 2020 from $1.07 billion at September 30, 2019. This increase consisted of a $145.42 million increase in non-interest bearing demand account balances, a $79.84 million increase in NOW checking account balances, a $55.36 million increase in savings account balances, and a $16.69 million increase in money market account balances. These increases were partially offset by a $7.13 million decrease in certificates of deposit account balances. The increase in deposits during the year was primarily driven by proceeds from PPP loans and government stimulus checks deposited directly into customer accounts, organic growth in customer relationships and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19. Total deposits increased $39.87 million, or 3%, during the current quarter to $1.36 billion at September 30, 2020, from $1.32 billion at June 30, 2020. The quarterly increase consisted of a $23.90 million increase in NOW checking account balances, a $14.79 million increase in non-interest bearing demand account balances, and a $7.22 million increase in savings account balances. These increases were partially offset by a $5.40 million decrease in certificates of deposit account balances and a small decrease in money market account balances.

Deposit Breakdown
($ in thousands)

  September 30, 2020 June 30, 2020   September 30, 2019 
 Amount Percent Amount Percent  Amount Percent
Non-interest-bearing demand 441,889 32% $427,102 32% $296,472 28%
NOW checking 376,899 28   352,999 27   297,055 28 
Savings 219,869 16   212,645 16   164,506 15 
Money market 149,922 11   150,611 12   136,151 13 
Money market – reciprocal 11,303 1   11,257 1   8,388 1 
Certificates of deposit under $250 129,579 10   131,980 10   133,241 12 
Certificates of deposit $250 and over 28,945 2   31,946 2   29,211 3 
Certificates of deposit – brokered -- --   -- --   3,203 -- 
Total deposits$1,358,406 100% $1,318,540 100% $1,068,227 100%
                  

FHLB Borrowings

Timberland borrowed $10.00 million from the Federal Home Loan Bank of Des Moines (“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 $4.82 million to $187.63 million at September 30, 2020, from $182.81 million at June 30, 2020. The increase in shareholders’ equity was primarily due to net income of $6.36 million for the quarter, which was partially offset by the payment of $1.66 million in dividends to shareholders.

Timberland temporarily suspended purchasing shares under its existing stock repurchase plan on March 16, 2020 as a result of the COVID-19 pandemic, but plans to resume purchasing shares under the existing stock repurchase plan in November 2020, subject to market conditions. There are 144,852 shares available to be repurchased under the existing stock repurchase plan.

Timberland remains well capitalized with a total risk-based capital ratio of 21.34% and a Tier 1 leverage capital ratio of 11.26% at September 30, 2020.

Asset Quality and Loan Deferrals

Timberland’s non-performing assets to total assets ratio improved to 0.27% at September 30, 2020 from 0.40% one year ago and 0.31% at June 30, 2020. There were net recoveries of $20,000 for the current quarter compared to net recoveries of $4,000 for the preceding quarter and net recoveries of $59,000 for the comparable quarter one year ago.  

A $500,000 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. As of June 30, 2020, Timberland had granted deferrals (primarily 90-day payment deferrals with interest continuing to accrue or be paid monthly) for 209 loans with balances aggregating to $135.83 million (approximately 13% of net loans receivable). However, the vast majority of borrowers on deferral status resumed making payments during the current quarter and as of September 30, 2020 only five loans with balances totaling $5.87 million (less than 1% of net loans receivable) remained on deferral status. The following table details the COVID-19 loan modifications, still on deferral status, as of September 30, 2020:

COVID-19 Loan Modifications
($ in thousands)

Industry / Collateral Type Amount Percent of
Net Loans Receivable
Hotel $2,884 0.28%
Construction  1,402 0.14 
Church  1,067 0.11 
One- to four-family mortgage  467 0.05 
Other consumer  50 -- 
Total loan modifications $5,870 0.58%
       

The ALL as a percentage of loans receivable increased to 1.31% at September 30, 2020 from 1.08% one year ago and 1.26% at June 30, 2020. If PPP loans, which are 100% SBA guaranteed, are excluded, the ALL to loans receivable (excluding PPP loans) at September 30, 2020 was 1.49% (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 $790,000 at September 30, 2020. The allowance for loan losses to loans receivable (excluding PPP loan balances and the remaining aggregate balance of the loans acquired in the South Sound Acquisition) was 1.60% (non-GAAP) at September 30, 2020.

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

  Sept. 30, June 30, Sept.30,
  2020 2020 2019
ALL to loans receivable 1.31% 1.26% 1.08%
ALL to loans receivable (excluding PPP loans) (non-GAAP) 1.49% 1.43% 1.08%
ALL to loans receivable (excluding PPP loans and South Sound Acquisition loans) (non-GAAP) 1.60% 1.55% 1.20%
          

Total delinquent loans (past due 30 days or more) and non-accrual loans decreased $177,000, or 5%, to $3.75 million at September 30, 2020, from $3.93 million one year ago, and increased $195,000, or 5%, from $3.55 million at June 30, 2020.   Non-accrual loans decreased $128,000, or 4%, to $2.91 million at September 30, 2020 from $3.03 million one year ago and decreased $110,000, or 4%, from $3.02 million at June 30, 2020.

Non-Accrual Loans
($ in thousands)

 September 30, 2020 June 30, 2020 September 30, 2019
 Amount Quantity Amount Quantity Amount Quantity
Mortgage loans:           
One- to four-family$659 3 $927 5 $699 3
Commercial 858 4  875 3  779 2
Land 394 3  185 2  204 2
Total mortgage loans 1,911 10  1,987 10  1,682 7
            
Consumer loans           
Home equity and second mortgage 555 6  586 7  603 6
Other 9 1  10 1  23 2
Total consumer loans 564 7  596 8  626 8
            
Commercial business loans 430 6  432 6  725 10
Total loans$2,905 23 $3,015 24 $3,033 25
               

OREO and other repossessed assets decreased 38% to $1.05 million at September 30, 2020, from $1.68 million at September 30, 2019, and decreased 28% from $1.47 million at June 30, 2020. At September 30, 2020, the OREO and other repossessed asset portfolio consisted of six individual land parcels. During the quarter ended September 30, 2020, two OREO properties were sold, resulting in a $2,000 gain. Timberland also recorded a $149,000 market value write-down expense on its largest remaining OREO property during the quarter in conjunction with accepting a purchase offer on the property. While there can be no assurances that this sale will close, the sale of this property (with a current book value of $702,000) is expected to close during the quarter ending December 31, 2020.

OREO and Other Repossessed Assets
($ in thousands)

 September 30, 2020 June 30, 2020 September 30, 2019
 Amount Quantity Amount Quantity Amount Quantity
Commercial$-- -- $-- -- $25 1
Land 1,050 6  1,466 8  1,658 11
Total$1,050 6 $1,466 8 $1,683 12
               

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 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.

TIMBERLAND BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
($ in thousands, except per share amounts)Sept. 30, June 30, Sept. 30,
(unaudited) 2020  2020  2019 
Interest and dividend income     
Loans receivable$12,884  $12,871 $12,670 
Investment securities 305   345  350 
Dividends from mutual funds, FHLB stock and other investments 33   23  40 
Interest bearing deposits in banks 371   429  1,323 
Total interest and dividend income 13,593   13,668  14,383 
      
Interest expense     
Deposits 1,044   1,159  1,233 
Borrowings 29   29  -- 
Total interest expense 1,073   1,188  1,233 
Net interest income 12,520   12,480  13,150 
Provision for loan losses 500   1,000  -- 
Net interest income after provision for loan losses 12,020   11,480  13,150 
      
Non-interest income     
Service charges on deposits 1,011   858  1,324 
ATM and debit card interchange transaction fees 1,200   1,069  1,140 
Gain on sales of loans, net 2,149   2,141  559 
Bank owned life insurance (“BOLI”) net earnings 149   148  139 
Servicing income on loans sold 22   35  91 
Valuation allowance on servicing rights, net (197)  --  (4)
Recoveries on investment securities, net 7   6  25 
Other 374   598  323 
Total non-interest income, net 4,715   4,855  3,597 
      
Non-interest expense     
Salaries and employee benefits 4,438   4,570  4,572 
Premises and equipment 1,048   1,077  885 
Loss (gain) on disposition of premises and equipment, net --   4  (1)
Advertising 138   150  153 
OREO and other repossessed assets, net 215   11  (26)
ATM and debit card processing 425   405  408 
Postage and courier 152   137  135 
State and local taxes 293   255  232 
Professional fees 342   286  332 
FDIC insurance expense (credit) 88   143  (55)
Loan administration and foreclosure 89   191  137 
Data processing and telecommunications 583   603  1,040 
Deposit operations 278   245  309 
Amortization of core deposit intangible (“CDI”) 102   101  113 
Other, net 552   483  539 
Total non-interest expense, net 8,743   8,661  8,773 
      
Income before income taxes 7,992   7,674  7,974 
Provision for income taxes 1,635   1,463  1,640 
Net income$6,357  $6,211 $6,334 
      
Net income per common share:     
Basic$0.76  $0.75 $0.76 
Diluted 0.76   0.74  0.75 
      
Weighted average common shares outstanding:     
Basic 8,310,793   8,309,947  8,333,812 
Diluted 8,379,170   8,378,983  8,468,266 
      


TIMBERLAND BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
($ in thousands, except per share amounts)Sept. 30, Sept. 30,
(unaudited) 2020   2019 
Interest and dividend income   
Loans receivable$51,341  $49,127 
Investment securities 1,579   1,264 
Dividends from mutual funds, FHLB stock and other investments 128   162 
Interest bearing deposits in banks 2,535   5,172 
Total interest and dividend income 55,583   55,725 
    
Interest expense   
Deposits 4,635   4,565 
Borrowings 66   -- 
Total interest expense 4,701   4,565 
Net interest income 50,882   51,160 
Provision for loan losses 3,700   -- 
Net interest income after provision for loan losses 47,182   51,160 
    
Non-interest income   
Service charges on deposits 4,147   4,904 
ATM and debit card interchange transaction fees 4,378   4,036 
Gain on sales of loans, net 5,979   1,754 
BOLI net earnings 591   1,641 
Servicing income on loans sold 193   466 
Valuation allowance on servicing rights, net (221)  (4)
Gain on sale of investment securities, net --   47 
Recoveries on investment securities, net 120   59 
Other 2,001   1,438 
Total non-interest income, net 17,188   14,341 
    
Non-interest expense   
Salaries and employee benefits 18,351   18,545 
Premises and equipment 3,962   3,831 
Loss (gain) on disposition of premises and equipment, net (98)  7 
Advertising 631   696 
OREO and other repossessed assets, net 276   221 
ATM and debit card processing 1,628   1,583 
Postage and courier 568   514 
State and local taxes 998   873 
Professional fees 1,107   1,019 
FDIC insurance expense 204   187 
Loan administration and foreclosure 448   382 
Data processing and telecommunications 2,285   3,707 
Deposit operations 1,114   1,358 
Amortization of CDI 406   452 
Other, net 2,183   2,205 
Total non-interest expense, net 34,063   35,580 
    
Income before income taxes 30,307   29,921 
Provision for income taxes 6,038   5,901 
Net income$24,269  $24,020 
Net income per common share:   
Basic$2.91  $2.89 
Diluted 2.88   2.84 
Weighted average common shares outstanding:   
Basic 8,326,600   8,318,928 
Diluted 8,422,486   8,468,226 
        


TIMBERLAND BANCORP INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
($ in thousands, except per share amounts) (unaudited) Sept. 30, June 30, Sept. 30,
   2020   2020   2019 
Assets      
Cash and due from financial institutions $21,877  $24,691  $25,179 
Interest-bearing deposits in banks  292,575   246,953   117,836 
Total cash and cash equivalents  314,452   271,644   143,015 
       
Certificates of deposit (“CDs”) held for investment, at cost  65,545   72,014   78,346 
Investment securities:      
Held to maturity, at amortized cost  27,390   30,660   31,102 
Available for sale, at fair value  57,907   41,914   22,532 
Investments in equity securities, at fair value  977   977   958 
FHLB stock  1,922   1,922   1,437 
Other investments, at cost  3,500   3,000   3,000 
Loans held for sale  4,509   9,837   6,071 
       
Loans receivable  1,027,289   1,025,653   896,352 
Less: Allowance for loan losses  (13,414)  (12,894)  (9,690)
Net loans receivable  1,013,875   1,012,759   886,662 
       
Premises and equipment, net  23,035   23,119   22,830 
OREO and other repossessed assets, net  1,050   1,466   1,683 
BOLI  21,596   21,447   21,005 
Accrued interest receivable  4,484   4,614   3,598 
Goodwill  15,131   15,131   15,131 
CDI  1,625   1,727   2,031 
Servicing rights, net  3,095   3,073   2,408 
Operating lease right-of-use assets  2,587   2,662   -- 
Other assets  3,298   3,676   5,323 
Total assets $1,565,978  $1,521,642  $1,247,132 
       
Liabilities and shareholders’ equity      
Deposits: Non-interest-bearing demand $441,889  $427,102  $296,472 
Deposits: Interest-bearing  916,517   891,438   771,755 
Total deposits  1,358,406   1,318,540   1,068,227 
       
Operating lease liabilities  2,630   2,695   -- 
FHLB borrowings  10,000   10,000   -- 
Other liabilities and accrued expenses  7,312   7,601   7,838 
Total liabilities  1,378,348   1,338,836   1,076,065 
       
Shareholders’ equity      
Common stock, $.01 par value; 50,000,000 shares authorized;            
8,310,793 shares issued and outstanding – September 30, 2020
8,310,793 shares issued and outstanding – June 30, 2020
8,329,419 shares issued and outstanding – September 30, 2019                    
  42,396   42,352   43,030 
Retained earnings  145,173   140,478   127,987 
Accumulated other comprehensive income (loss)  61   (24)  50 
Total shareholders’ equity  187,630   182,806   171,067 
Total liabilities and shareholders’ equity $1,565,978  $1,521,642  $1,247,132 
             


KEY FINANCIAL RATIOS AND DATAThree Months Ended
($ in thousands, except per share amounts) (unaudited)Sept. 30, June 30, Sept. 30,
  2020   2020   2019 
PERFORMANCE RATIOS:     
Return on average assets (a) 1.65%  1.70%  2.04%
Return on average equity (a) 13.78%  13.83%  15.07%
Net interest margin (a) 3.44%  3.63%  4.54%
Efficiency ratio 50.73%  49.96%  52.39%
      
 Year Ended
 Sept. 30,
2020
   Sept. 30,
2019
PERFORMANCE RATIOS:     
Return on average assets (a) 1.75%    1.96%
Return on average equity (a) 13.59%    14.91%
Net interest margin (a) 3.90%    4.50%
Efficiency ratio 50.04%    54.32%
      
 Sept. 30, June 30, Sept. 30,
  2020   2020   2019 
ASSET QUALITY RATIOS AND DATA:     
Non-accrual loans$2,905  $3,015  $3,033 
Loans past due 90 days and still accruing --   --   -- 
Non-performing investment securities 209   228   294 
OREO and other repossessed assets 1,050   1,466   1,683 
Total non-performing assets (b)$4,164  $4,709  $5,010 
      
Non-performing assets to total assets (b) 0.27%  0.31%  0.40%
Net charge-offs (recoveries) during quarter$(20) $(4) $(59)
ALL to non-accrual loans 462%  428%  319%
ALL to loans receivable (c) 1.31%  1.26%  1.08%
ALL to loans receivable (excluding PPP loans) (d) (non-GAAP) 1.49%  1.43%  1.08%
ALL to loans receivable (excluding PPP loans and South Sound Acquisition loans) (d) (e) (non-GAAP) 1.60%  1.55%  1.20%
Troubled debt restructured loans on accrual status (f)$2,868  $2,876  $2,903 
      
CAPITAL RATIOS:     
Tier 1 leverage capital 11.26%  11.55%  12.65%
Tier 1 risk-based capital 20.08%  19.39%  18.40%
Common equity Tier 1 risk-based capital 20.08%  19.39%  18.40%
Total risk-based capital 21.34%  20.65%  19.57%
Tangible common equity to tangible assets (non-GAAP) 11.03%  11.03%  12.51%
      
BOOK VALUES:     
Book value per common share$22.58  $22.00  $20.54 
Tangible book value per common share (g) 20.56   19.97   18.48 
            

________________________________________________
(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 $126,820, $122,581 and $0 at September 30, 2020, June 30, 2020 and September 30, 2019, respectively.
(e) Does not include loans acquired in the South Sound Acquisition totaling $63,721, $73,084 and $88,099 at September 30, 2020, June 30, 2020 and September 30, 2019, respectively.
(f) Does not include troubled debt restructured loans totaling $203, $207 and $366 reported as non-accrual loans at September 30, 2020, June 30, 2020 and September 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
 September 30, 2020 June 30, 2020 September 30, 2019
 Amount Rate Amount Rate Amount Rate
            
Assets           
Loans receivable and loans held for sale$1,031,689  5.00% $1,015,966  5.07% $891,109  5.69%
Investment securities and FHLB stock (1) 84,756  1.59   81,086  1.82   47,660  3.27 
Interest-earning deposits in banks and CDs 339,224  0.44   278,158  0.62   219,567  2.39 
Total interest-earning assets 1,455,669  3.74   1,375,210  3.97   1,158,336  4.97 
Other assets 87,140     87,905     83,308   
Total assets$1,542,809    $1,463,115    $1,241,644   
            
Liabilities and Shareholders’ Equity           
NOW checking accounts$360,622  0.23% $332,502  0.26% $295,612  0.30%
Money market accounts 159,951  0.38   156,537  0.47   147,885  0.70 
Savings accounts 214,080  0.09   199,054  0.11   162,654  0.06 
Certificates of deposit accounts 161,674  1.55   168,368  1.68   164,530  1.75 
Total interest-bearing deposits 896,327  0.47   856,461  0.54   770,681  0.63 
Borrowings 10,000  1.15   10,000  1.17   --  -- 
Total interest-bearing liabilities 906,327  0.47   866,461  0.55   770,681  0.63 
            
Non-interest-bearing demand deposits 440,950     406,396     296,741   
Other liabilities 10,966     10,684     6,050   
Shareholders’ equity 184,566     179,574     168,172   
Total liabilities and shareholders’ equity$1,542,809    $1,463,115    $1,241,644   
            
Interest rate spread  3.27%   3.42%   4.34%
Net interest margin (2)  3.44%   3.63%   4.54%
Average interest-earning assets to average interest-bearing liabilities 160.61%    158.72%    150.30%  
                  

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

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

 For the Year Ended
 September 30, 2020 September 30, 2019
 Amount Rate Amount Rate
        
Assets       
Loans receivable and loans held for sale$970,400  5.29% $878,984  5.59%
Investment securities and FHLB Stock (1) 78,412  2.18   43,394  3.28 
Interest-earning deposits in banks and CD’s 254,558  1.00   214,481  2.41 
Total interest-earning assets 1,303,370  4.26   1,136,859  4.90 
Other assets 85,842     86,494   
Total assets$1,389,212    $1,223,353   
        
Liabilities and Shareholders’ Equity       
NOW checking accounts$323,261  0.27% $291,348  0.29%
Money market accounts 148,506  0.49   154,375  0.72 
Savings accounts 191,618  0.10   162,266  0.07 
Certificate of deposit accounts 166,521  1.70   159,397  1.57 
Total interest-bearing deposits 829,906  0.56   767,386  0.59 
Borrowings 5,685  1.16   --  -- 
Total interest-bearing liabilities 835,591  0.56   767,386  0.59 
        
Non-interest-bearing demand deposits 364,971     290,653   
Other liabilities 10,110     4,229   
Shareholders’ equity 178,540     161,085   
Total liabilities and shareholders’ equity$1,389,212    $1,223,353   
        
Interest rate spread  3.70%   4.31%
Net interest margin (2)  3.90%   4.50%
Average interest-earning assets to average interest-bearing liabilities 155.98%    148.15%  
            

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

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)September 30, 2020 June 30, 2020 September 30, 2019
      
Shareholders’ equity$187,630  $182,806  $171,067 
Less goodwill and CDI (16,756)  (16,858)  (17,162)
Tangible common equity$170,874  $165,948  $153,905 
      
Total assets$1,565,978  $1,521,642  $1,247,132 
Less goodwill and CDI (16,756)  (16,858)  (17,162)
Tangible assets$1,549,222  $1,504,784  $1,229,970 
            


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