Timberland Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2020; financial statements are unaudited. Year-to-date figures cover the nine months ended June 30, 2020. Timberland Bank is the company’s principal operating subsidiary, serving western Washington.
Financial performance and condition
| Metric | Q3 2020 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net income | $6.21 million; diluted EPS $0.74 | Q3 2019: $5.96 million; $0.70 |
| Year-to-date net income | $17.91 million; diluted EPS $2.12 | YTD 2019: $17.69 million; $2.09 |
| Net interest income | Quarter: $12.48 million; YTD: $38.36 million | Quarter: $12.94 million; YTD: $38.01 million |
| Net interest margin | Quarter: 3.63%; YTD: 4.08% | 2019 quarter and YTD: 4.49% |
| Assets | $1.522 billion | $1.247 billion at September 30, 2019 |
| Net loans / deposits | $1.013 billion / $1.319 billion | $886.7 million / $1.068 billion at September 30, 2019 |
| Allowance for loan losses | $12.89 million; 1.26% of loans receivable | $9.69 million; 1.08% at September 30, 2019 |
| Cash and cash equivalents | $271.64 million | $143.02 million at September 30, 2019 |
| Shareholders’ equity | $182.81 million | $171.07 million at September 30, 2019 |
Q3 return on average assets was 1.70%, return on average equity 13.83%, and the efficiency ratio 49.96%. The comparable 2019 quarter reported 1.93%, 14.56%, and 54.43%, respectively. Q3 provision for loan losses was $1.00 million; year-to-date provision was $3.20 million, compared with none in 2019.
For the first nine months, operating cash flow was $21.45 million, investing cash flow was negative $146.87 million, and financing cash flow was positive $254.05 million. Cash increased by $128.63 million. The company had $10 million of FHLB borrowings outstanding; these consisted of two five-year and seven-year advances bearing rates of 1.19% and 1.11%.
At June 30, the Bank’s regulatory liquidity ratio was 27.35%; it reported $365.40 million available for additional FHLB borrowing and $73.39 million available from the Federal Reserve, subject to collateral. The Bank exceeded regulatory capital requirements and was classified as well-capitalized: its leverage ratio was 11.35%, CET1 and Tier 1 risk-based ratios were 19.04%, and total risk-based capital was 20.29%.
Material changes and operating drivers
- Assets grew 22.0% from September 30, 2019, led by deposit-funded cash, loan, and securities growth. Deposits increased 23.4%; non-interest-bearing demand deposits rose to $427.1 million.
- Net loans rose 14.2%. The portfolio included $122.58 million of SBA Paycheck Protection Program loans, which were fully SBA-guaranteed and excluded from the allowance calculation. Commercial real estate and commercial business lending also increased.
- Q3 net income rose 4.3% year over year. Higher non-interest income, particularly loan-sale gains, and lower non-interest expense more than offset lower net interest income and the $1 million loan-loss provision. YTD net income rose 1.3%.
- Q3 non-interest income increased 37.2% to $4.86 million, including $2.14 million of net gains on loan sales. Q3 non-interest expense fell 3.4% to $8.66 million, in part because prior-year costs included core-system conversion expenses.
- Lower market rates reduced the quarterly average yield on interest-earning assets to 3.97% from 4.92%. The resulting NIM fell to 3.63% from 4.49%; management attributed pressure to rate cuts and expects net interest income and margin to be adversely affected in the current fiscal year and possibly longer.
- The company repurchased 56,601 shares for $1.24 million during the nine-month period, then suspended repurchases on March 16, 2020 because of COVID-19 uncertainty. No shares were repurchased during Q3. Quarterly dividends were $0.20 per share, versus $0.25 a year earlier.
Outlook, risks, and unusual items
- No quantified earnings, revenue, or margin guidance is provided. Management warns that COVID-19’s duration and economic effects are uncertain and may adversely affect borrowers, credit quality, operations, asset values, and earnings.
- As of June 30, 209 loans totaling $135.83 million, or 13.2% of loans receivable, had approved COVID-related modifications. These included payment deferrals and were not classified as troubled debt restructurings under applicable CARES Act and regulatory guidance. Further relief requests would be reassessed.
- Non-performing assets were $4.71 million, or 0.31% of assets; non-accrual loans were $3.02 million. Management considered the $12.89 million allowance adequate but cautioned that deterioration in economic conditions could require additional provisions and materially affect results.
- PPP loans carry a 1% interest rate, with origination fees recognized over the loan term. Management expected most borrowers to seek forgiveness; the filing notes evolving SBA rules and potential servicing and forgiveness-administration risks.
- Goodwill of $15.13 million was not impaired in the fiscal 2020 test as of May 31, 2020. Management cautioned that sustained adverse economic conditions or a sustained stock-price decline could trigger future impairment.
- The company adopted lease accounting on October 1, 2019, recording $2.66 million of operating lease right-of-use assets and $2.70 million of lease liabilities at June 30, 2020. This adoption did not restate comparative periods.
- Management identified risks including interest-rate and funding changes, commercial real estate and other credit exposure, deposit retention, market conditions, regulatory actions, cybersecurity and third-party service disruptions. No material legal proceedings were reported.
Most important facts for investors to verify
- How modified borrowers perform when deferrals expire, and whether delinquencies, criticized loans, charge-offs, or allowance needs rise.
- The timing and extent of PPP loan forgiveness, SBA reimbursement, and recognition of remaining origination fees.
- Whether deposit growth and elevated liquidity persist, and how falling asset yields affect NIM and earnings.
- Whether the reported allowance, capital, and available borrowing capacity remain adequate under further economic stress.
- Whether COVID-19 effects or share-price weakness lead to goodwill impairment, and whether the company resumes repurchases or changes its dividend.