Timberland Bancorp(TSBK) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Timberland Bancorp's unaudited consolidated financial statements, detailing asset and deposit growth, and increased loan loss provisions Consolidated Balance Sheets Total assets increased by 22.0% to $1.52 billion as of June 30, 2020, primarily driven by growth in cash, equivalents, and net loans, funded by a 23.4% rise in total deposits Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2020 | September 30, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $1,521,642 | $1,247,132 | +22.0% | | Cash and cash equivalents | $271,644 | $143,015 | +89.9% | | Loans receivable, net | $1,012,759 | $886,662 | +14.2% | | Total Deposits | $1,318,540 | $1,068,227 | +23.4% | | Total Liabilities | $1,338,836 | $1,076,065 | +24.4% | | Total Shareholders' Equity | $182,806 | $171,067 | +6.9% | Consolidated Statements of Income Net income for Q3 2020 rose 4.3% year-over-year to $6.21 million, while the nine-month net income increased 1.3% to $17.91 million, reflecting higher non-interest income offset by a significant provision for loan losses Key Income Statement Data (in thousands, except per share amounts) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $12,480 | $12,937 | $38,362 | $38,010 | | Provision for loan losses | $1,000 | $0 | $3,200 | $0 | | Non-interest income | $4,855 | $3,538 | $12,473 | $10,744 | | Net Income | $6,211 | $5,956 | $17,912 | $17,685 | | Diluted EPS | $0.74 | $0.70 | $2.12 | $2.09 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q3 2020 was $6.37 million, and $17.84 million for the nine months ended June 30, 2020, primarily reflecting net income with minor adjustments Comprehensive Income (in thousands) | Period | Net Income | Other Comprehensive Income (Loss) | Total Comprehensive Income | | :--- | :--- | :--- | :--- | | Three Months Ended June 30, 2020 | $6,211 | $155 | $6,366 | | Three Months Ended June 30, 2019 | $5,956 | $12 | $5,968 | | Nine Months Ended June 30, 2020 | $17,912 | ($74) | $17,838 | | Nine Months Ended June 30, 2019 | $17,685 | $33 | $17,718 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $182.8 million by June 30, 2020, driven by net income, partially offset by dividends and stock repurchases - Key drivers of the change in shareholders' equity for the nine months ended June 30, 2020 include: - Net Income: +$17.91 million - Common Stock Dividends: -$5.42 million - Repurchase of Common Stock: -$1.24 million[23] Consolidated Statements of Cash Flows Net cash provided by financing activities totaled $254.0 million for the nine months ended June 30, 2020, primarily from increased deposits, supporting a $128.6 million net increase in cash and equivalents Cash Flow Summary for Nine Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $21,449 | $17,565 | | Net cash used in investing activities | ($146,865) | ($22,112) | | Net cash provided by financing activities | $254,045 | $26,518 | | Net increase in cash and cash equivalents | $128,629 | $21,971 | Notes to Unaudited Consolidated Financial Statements The notes detail the basis of presentation, the 2018 South Sound Acquisition, and specifics on financial instruments, including a breakdown of the loan portfolio, PPP loans, and increased allowance for loan losses - As of June 30, 2020, the company had approved COVID-19 pandemic-related loan modifications for 209 loans totaling $135.83 million, which are not classified as Troubled Debt Restructurings (TDRs) per CARES Act guidance[87][88] - The loan portfolio included $122.58 million in U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) loans as of June 30, 2020[66] - The allowance for loan losses increased from $9.69 million at September 30, 2019 to $12.89 million at June 30, 2020, with a $3.2 million provision recorded during the nine-month period primarily due to the economic outlook[68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant balance sheet growth driven by deposits and PPP loans, operating results impacted by lower net interest margin, and proactive responses to the COVID-19 pandemic Overview The company, a community bank in Western Washington, expects profitability to be adversely affected by the COVID-19 pandemic and interest rate cuts, leading to a $3.2 million provision for loan losses - The company's profitability depends primarily on net interest income, which is expected to be adversely affected by the COVID-19 pandemic and the 150 basis point reduction in the targeted federal funds rate[145] - A provision for loan losses of $3.20 million was recorded for the nine months ended June 30, 2020, compared to none in the prior-year period, due to probable credit losses from the COVID-19 pandemic's economic impact[146] Comparison of Financial Condition From September 30, 2019, to June 30, 2020, total assets grew 22.0% to $1.52 billion, fueled by a 23.4% increase in deposits and a 14.2% rise in net loans, largely due to SBA PPP originations Key Financial Condition Changes (June 30, 2020 vs. Sep 30, 2019) | Metric | Change | Key Driver(s) | | :--- | :--- | :--- | | Total Assets | +$274.5M (+22.0%) | Increases in cash, net loans, and investment securities | | Net Loans Receivable | +$126.1M (+14.2%) | Origination of $122.58M in SBA PPP loans | | Total Deposits | +$250.3M (+23.4%) | Growth in demand, NOW, and savings accounts, partly from stimulus | | Shareholders' Equity | +$11.7M (+6.9%) | Net income partially offset by dividends and stock repurchases | Comparison of Operating Results For the nine months ended June 30, 2020, net income rose 1.3% to $17.91 million, driven by higher non-interest income and lower non-interest expense, largely offset by a $3.20 million provision for loan losses - Net income for the nine months ended June 30, 2020, increased by $227,000 (1.3%) year-over-year, primarily due to higher non-interest income and lower non-interest expense, offset by a $3.20 million provision for loan losses[177] - Net interest margin (NIM) for Q3 2020 decreased to 3.63% from 4.49% in Q3 2019, primarily due to the significant drop in market interest rates[182] - The efficiency ratio improved to 49.81% for the nine months ended June 30, 2020, from 54.98% in the prior-year period, reflecting better cost management[202] Asset Quality Asset quality remained stable, with non-performing assets to total assets improving to 0.31%, while the allowance for loan losses increased to 1.26% of loans receivable (excluding PPP loans) due to COVID-19 impacts Non-Performing Assets (in thousands) | Category | June 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Non-accrual loans | $3,015 | $3,033 | | OREO and other repossessed assets | $1,466 | $1,683 | | Total non-performing assets | $4,709 | $5,010 | | NPA / Total Assets | 0.31% | 0.40% | - The company approved COVID-19 related loan modifications for 209 loans aggregating to $135.83 million, or 13.2% of loans receivable, as of June 30, 2020[175] Liquidity and Capital Resources The company maintained a strong liquidity position with a regulatory liquidity ratio of 27.35% and $343.7 million in cash and equivalents, remaining "well-capitalized" under all regulatory measures Bank Regulatory Capital Ratios (June 30, 2020) | Ratio | Actual | "Well Capitalized" Minimum | | :--- | :--- | :--- | | Tier 1 leverage capital | 11.35% | 5.00% | | Common equity tier 1 capital | 19.04% | 6.50% | | Tier 1 capital | 19.04% | 8.00% | | Total capital | 20.29% | 10.00% | - At June 30, 2020, the Bank had $365.40 million available for additional FHLB borrowings and $73.39 million available with the FRB[207] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes in market risk information since its Annual Report on Form 10-K for the fiscal year ended September 30, 2019 - No material changes in market risk were reported since the last Form 10-K filing[217] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020[219] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[219] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reported that neither it nor its subsidiary, Timberland Bank, is a party to any material legal proceedings - The Company and the Bank are not currently party to any material legal proceedings[221] Item 1A. Risk Factors The company added a significant risk factor concerning the COVID-19 pandemic, highlighting adverse impacts on operations, financial results, credit quality, cybersecurity, loan loss estimation, net interest margin, PPP loan administration, and potential goodwill impairment - The COVID-19 pandemic is expected to adversely impact net interest income and margin, and will likely lead to increased loan delinquencies, adversely classified loans, and charge-offs[226][227] - The company faces operational risks from remote work arrangements and administrative complexities related to servicing its $122.58 million portfolio of SBA PPP loans, particularly concerning loan forgiveness[225][229] - A sustained economic downturn or a continued decrease in the company's stock price could trigger a goodwill impairment charge, which would materially affect results of operations[230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the quarter ended June 30, 2020, with 144,852 shares remaining available for repurchase under the existing plan - No shares were repurchased during the three months ended June 30, 2020[234] - As of June 30, 2020, there were 144,852 shares authorized to be repurchased under the existing stock repurchase plan[234] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - Not applicable[235] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[236] Item 5. Other Information There was no other information to be reported for the period - None to be reported[237] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, compensation plans, and required CEO and CFO certifications - The report includes exhibits such as the Agreement and Plan of Merger, Articles of Incorporation, Bylaws, various stock and equity plans, and officer certifications (31.1, 31.2, 32)[241]