TSBK - Timberland Bancorp Fiscal Year Net Income Increases 44% to $24.02 million

• Fiscal Year Earnings Per Share Increases 28% to $2.84
• Fiscal Year Return on Average Equity Increases to 14.91%
• Fiscal Year Return on Average Assets Increases to 1.96%
• Announces $0.15 Regular Quarterly Dividend and $0.10 Special Dividend

HOQUIAM, Wash., Oct. 31, 2019 (GLOBE NEWSWIRE) -- Timberland Bancorp, Inc. (NASDAQ: TSBK) (“Timberland” or “the Company”) today reported net income increased 44% to $24.02 million for the fiscal year ended September 30, 2019 from $16.72 million for the fiscal year ended September 30, 2018.  Earnings per diluted common share (“EPS”) increased 28% to $2.84 for the fiscal year 2019 from $2.22 for the prior fiscal year.

Timberland also reported quarterly net income of $6.33 million, or $0.75 per diluted common share, for the quarter ended September 30, 2019.  This compares to net income of $5.96 million, or $0.70 per diluted common share, for the preceding quarter and net income of $4.42 million, or $0.59 per diluted common share, for the quarter ended September 30, 2018.

“We are pleased to report record net income for the year ended September 30, 2019 and, for the ninth consecutive fiscal year, increases in revenue, earnings per share, return on average equity and return on average assets,” stated Michael Sand, President and CEO.  “The Northwest economy continues to provide an enviable economic environment within which to operate and we continue to develop lending and deposit relationships throughout our six county Western Washington footprint.  The completion of the South Sound Bank acquisition on the first day of our recently completed fiscal year contributed to Timberland’s year-over-year earnings growth and provided additional opportunities to increase customer relationships along Washington’s economically important I-5 corridor.  Despite incurring $492,000 ($389,000 after tax) in conversion related IT expenses during the September quarter, the quarter’s efficiency ratio improved to 52.39% from 56.94% for the comparable quarter one year ago.”

“Also, during our recently completed fiscal year we were honored to be recognized for the second consecutive year by Raymond James as being in the top 10% of community banks in the country, as measured by various financial metrics, and, by Sandler O’Neill, as one of the 30 best performing small cap banks in the country.”  

“In addition to declaring a regular dividend of $0.15 per share, Timberland’s Board of Directors also declared a one-time special dividend of $0.10 per share payable on November 29, 2019 to shareholders of record on November 15, 2019.  Timberland’s continued solid financial performance has allowed us to pay a special cash dividend for the second time this calendar year while continuing to maintain a very strong capital position to support future growth,” added Sand.  “The payment of these two declared dividends combined with the dividends paid for the prior three quarters represents a payment to shareholders of $0.80 per share for the four quarter period.”

During the quarter, Timberland repurchased 17,609 shares of its common stock for $428,000 at an average price of $24.33 per share.  At September 30, 2019, Timberland had 201,453 shares available to be repurchased in accordance with the terms of its existing stock repurchase plan.

2019 Fiscal Year Earnings and Balance Sheet Highlights (at or for the period ended September 30, 2019, compared to September 30, 2018, or June 30, 2019):

Earnings Highlights:

• Net income increased 44% to $24.02 million for the 2019 fiscal year from $16.72 million for the 2018 fiscal year;
• Fiscal year 2019 EPS increased 28% to $2.84 from $2.22 for fiscal year 2018;
• EPS for the current quarter increased 27% to $0.75 from $0.59 for the comparable quarter one year ago and increased 7% from $0.70 for the preceding quarter;
• Return on average equity increased to 15.07% for the current quarter and 14.91% for the 2019 fiscal year;
• Return on average assets increased to 2.04% for the current quarter and 1.96% for the 2019 fiscal year;
• Net interest margin improved to 4.54% for the current quarter and 4.50% for the 2019 fiscal year; and
• Efficiency ratio improved to 54.32% for the 2019 fiscal year from 56.55% for the 2018 fiscal year.

Balance Sheet Highlights:

• Total assets increased 22% year-over-year;
• Total deposits increased 20% year-over-year;
• Net loans receivable increased 22% year-over-year; and
• Book and tangible book (non-GAAP) values per common share increased to $20.54 and $18.48, respectively, at September 30, 2019.

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 Bank Owned Life Insurance (“BOLI”) payouts) increased 25% for the 2019 fiscal year to $64.37 million from $51.53 million for the 2018 fiscal year.  For the current quarter operating revenue increased 24% to $16.72 million from $13.44 million for the comparable quarter one year ago and increased 2% from $16.37 million for the preceding quarter.

Net interest income for the 2019 fiscal year increased 31% to $51.16 million from $39.06 million for the 2018 fiscal year.  The year-over-year increase in net interest income was primarily due to a 23% increase in average interest-earning assets, primarily as a result of the acquisition of South Sound Bank (“South Sound Acquisition”).  Net interest income for the current quarter increased 28% to $13.15 million from $10.27 million for the comparable quarter one year ago and increased 2% from $12.94 million for the preceding quarter.

Timberland’s net interest margin (“NIM”) for the fiscal year ended September 30, 2019, increased to 4.50% from 4.23% for the fiscal year ended September 30, 2018.  The net interest margin for the current quarter increased to 4.54% from 4.35% for the comparable quarter one year ago and from 4.49% for the preceding quarter.  The NIM for the current quarter was increased by approximately eight 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 $45,000 of non-accrual interest.  The NIM for the comparable quarter one year ago was increased by approximately five basis points due to the collection of $107,000 of non-accrual interest and late fees.  The NIM for the preceding quarter 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.

Non-interest income for fiscal year 2019 increased 14% to $14.34 million from $12.54 million for the prior fiscal year.  The increase was primarily due to a $1.09 million increase in BOLI net earnings, a $466,000 increase in ATM and debit card interchange transaction fees, and a $323,000 increase in service charges on deposits.  The increased BOLI income was primarily the result of a $1.03 million BOLI death benefit claim.  The increases in ATM and debit card interchange fees and service charges on deposits were primarily a result of income from deposit accounts acquired in the South Sound Acquisition.  Non-interest income increased 2% to $3.60 million for the current quarter from $3.54 million for the preceding quarter primarily due to an increase in service charges on deposits and smaller increases in several other categories, which were partially offset by small decreases in several categories.

For fiscal year 2019, total (non-interest) operating expenses increased 22% to $35.58 million from $29.18 million for the prior fiscal year primarily as a result increased staffing, operating and conversion expenses associated with the South Sound Acquisition and expenses associated with Timberland’s core operating system conversion.  During the year ended September 30, 2019, Timberland’s core operating system conversion expenses (including the termination fees associated with South Sound Bank’s core system provider) totaled $1.38 million.  The efficiency ratio for fiscal year 2019 improved to 54.32% from 56.55% for fiscal year 2018 as increases in revenue outpaced increases in expenses.

Total operating expenses for the current quarter decreased 2% to $8.77 million from $8.97 million for the preceding quarter and increased 15% from $7.66 million for the comparable quarter one year ago.  The decrease in expenses for the current quarter compared to the preceding quarter was primarily due to decreases in OREO related expenses, FDIC insurance expense and smaller decreases in several other expense categories. The decrease in OREO related expenses was primarily due to the sale of two OREO properties (which resulted in net gains on sale during the quarter of $56,000) and lower overall operating expenses on the remaining OREOs.  FDIC insurance expense was reduced due to the Bank’s receipt of an FDIC insurance assessment credit during the quarter.  During the current quarter, the Bank incurred core operating system conversion related expenses of $492,000 compared to $435,000 for the preceding quarter.  The efficiency ratio improved to 52.39% for the current quarter compared to 54.43% for the preceding quarter and 56.94% for the comparable quarter one year ago.

The provision for income taxes for fiscal year 2019 increased $200,000 to $5.90 million from $5.70 million for fiscal year 2018 as higher income before income taxes was partially offset by a lower effective tax rate.  Timberland’s effective tax rate for fiscal year 2019 was 19.7% compared to 25.4% for fiscal year 2018.  The decrease in the effective tax rate for the fiscal year just ended was primarily due to provisions of the Tax Cuts and Jobs Acts legislation, (signed into law on December 22, 2017) which decreased the federal corporate income tax rate to 21.0% from 35.0%.  As a result of this legislation, Timberland used a blended federal income tax rate of 24.5% for its 2018 fiscal year and 21.0% during its 2019 fiscal year.  A higher percentage of tax-exempt income, primarily due to a BOLI death benefit payout, also contributed to the lower effective tax rate for fiscal year 2019.  

The provision for income taxes for the current quarter increased $88,000 to $1.64 million from $1.55 million for the preceding quarter primarily due to higher income before income taxes.  Timberland’s effective tax rate was 20.6% for the quarter ended September 30, 2019 compared to 20.7% for the quarter ended June 30, 2019 and 23.7% for the quarter ended one year ago. 

Balance Sheet Management

Total assets increased $228.84 million, or 22%, during the fiscal year to $1.25 billion at September 30, 2019, from $1.02 billion at September 30, 2018.  The increase in total assets was primarily due to the South Sound Acquisition, which resulted in a $183.10 million increase in total assets (including goodwill and net of cash consideration paid) at the acquisition date (October 1, 2018) and, to a lesser extent, organic growth.  Total assets remained relatively stable (a $178,000 decrease) for the current quarter compared to the preceding quarter as increases in net loans receivable and investment securities were offset by a decrease in cash and cash equivalents.

Net loans receivable increased $161.27 million, or 22%, during the fiscal year to $886.66 million at September 30, 2019, from $725.39 million at September 30, 2018.  The increase was primarily due to loans acquired in the South Sound Acquisition ($121.54 million at the merger date) and, to a lesser extent, organic loan growth.

Net loans receivable increased $12.68 million, or 1%, during the current quarter to $886.66 million at September 30, 2019, from $873.98 million at June 30, 2019.  The increase was primarily due to a $5.66 million increase in multi-family loans, a $4.12 million increase in land loans, a $3.61 million increase in 1-4 family mortgage loans, a $592,000 net increase in construction loans, a $950,000 decrease in the undisbursed construction loans in progress and smaller increases in several other categories.  These increases to net loans receivable were partially offset by a $2.15 million decrease in consumer loans and smaller decreases in several other categories.   

LOAN PORTFOLIO

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^(a) Does not include one- to four-family loans held for sale totaling $6,071, $3,338 and $1,785 at September 30, 2019, June 30, 2019 and September 30, 2018, respectively. 

Timberland originated $96.41 million in loans during the quarter ended September 30, 2019, compared to $83.30 million for the preceding quarter and $99.27 million for the comparable quarter one year ago.  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 U.S. Small Business Administration (“SBA”) loans.  During the fourth quarter of fiscal 2019 fixed-rate one- to four-family mortgage loans and SBA loans totaling $19.77 million were sold compared to $19.91 million for the preceding quarter and $17.42 million for the comparable quarter one year ago.
                                            
Investment securities and CDs held for investment increased $11.16 million, or 9%, to $132.96 million at September 30, 2019, from $121.81 million at June 30, 2019.  The increase was primarily due to the purchase of additional mortgage-backed investment securities 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 22.8% of total liabilities at September 30, 2019, compared to 23.6% at June 30, 2019, and 23.9% one year ago. 

Total deposits increased $178.72 million, or 20%, during the fiscal year to $1.068 billion at September 30, 2019, from $889.51 million at September 30, 2018.  This increase was primarily due to deposits acquired in the South Sound Acquisition ($151.54 million at the acquisition date) and, to a lesser extent, organic deposit growth. 

Total deposits decreased $4.31 million during the current quarter to $1.068 billion at September 30, 2019 from $1.073 billion at June 30, 2019.  The quarterly decrease consisted of a $10.30 million decrease in money market account balances and a $5.34 million decrease in NOW checking account balances.  These decreases were partially offset by an $8.92 million increase in non-interest bearing demand account balances, a $1.46 million increase in certificates of deposit account balances and a $946,000 increase in savings account balances.

Shareholders’ Equity

Total shareholders’ equity increased $4.80 million to $171.07 million at September 30, 2019, from $166.27 million at June 30, 2019.  The increase in shareholders’ equity was primarily due to net income of $6.33 million for the quarter, which was partially offset by dividend payments to shareholders of $1.25 million and common stock repurchases of $428,000. 

During the quarter, Timberland repurchased 17,609 shares of its common stock for $428,000 (an average price of $24.33 per share).  Timberland had 201,453 shares available to be repurchased on its existing stock repurchase plan at September 30, 2019.

Capital Ratios and Asset Quality

Timberland remains well capitalized with a total risk-based capital ratio of 19.57% and a Tier 1 leverage capital ratio of 12.65% at September 30, 2019.

Asset quality remains strong with a non-performing assets to total assets ratio of 0.40% at September 30, 2019, compared to 0.36% one year ago and 0.43% at June 30, 2019.

No provision for loan losses was made for the quarters ended September 30, 2019, June 30, 2019, and September 30, 2018.  There were net recoveries of $59,000 for the current quarter compared to net charge-offs of $110,000 for the preceding quarter and net charge-offs of $2,000 for the comparable quarter one year ago.  The allowance for loan losses to loans receivable was 1.08% at September 30, 2019 compared to 1.09% at June 30, 2019 and 1.30% at September 30, 2018.  The decrease in the allowance for loan losses as a percentage of loans receivable over the past year was primarily a result of an increase in loans from the South Sound Acquisition.  Included in the recorded value of loans acquired in mergers 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 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 $1.39 million at September 30, 2019.  The allowance for loan losses to loans receivable (excluding the remaining balance of the loans acquired in the South Sound Acquisition) was 1.20% (non-GAAP) at September 30, 2019.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased $404,000, or 11%, to $3.93 million at September 30, 2019, from $3.52 million at June 30, 2019, and increased $1.37 million, or 54%, from $2.56 million one year ago.  Non-accrual loans decreased $317,000, or 9%, to $3.03 million at September 30, 2019, from $3.35 million at June 30, 2019, and increased $1.72 million, or 130%, from $1.32 million one year ago. A portion of the year-over year increase in delinquent loans and non-accrual loans was attributable to loans acquired in the South Sound Acquisition.

NON-ACCRUAL LOANS

OREO and other repossessed assets decreased 2% to $1.68 million at September 30, 2019, from $1.72 million at June 30, 2019, and decreased 12% from $1.91 million at September 30, 2018.  At September 30, 2019, the OREO and other repossessed asset portfolio consisted of 11 individual land parcels and one commercial real estate property.  During the quarter ended September 30, 2019, two OREO properties were sold for a net gain of $56,000.

OREO and OTHER REPOSSESSED 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).

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.  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. 

The South Sound Acquisition was accounted for as a business combination.  Accordingly, Timberland’s cost to acquire South Sound Bank was allocated to the assets acquired (including identifiable intangible assets) and liabilities assumed of South Sound Bank at their respective estimated fair values as of the acquisition date.  The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill.

The following table summarizes the fair value of consideration transferred, the estimated fair value of the assets acquired and liabilities assumed at October 1, 2018, and the resulting goodwill from the transaction ($ in thousands):

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 or 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 the implementation of related rules and 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; 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.

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^(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) Loans receivable does not include loans held for sale and is before the allowance for loan losses.
^(d) Does not include troubled debt restructured loans totaling $366, $292 and $323 reported as non-accrual loans at September 30, 2019, June 30, 2019 and September 30, 2018, respectively.
^(e) Tangible common equity divided by common shares outstanding (non-GAAP).                                                                                                                                                                                                                           

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