TIMBERLAND BANCORP INC

Previous wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q. The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2024.

Current wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q. The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three months ended December 31, 2024.

Previous wording

•increased competitive pressures among financial services companies;

Current wording

•increased competitive pressures among financial services companies, including repricing and competitors' pricing initiatives, and their impact on our market position, loan and deposit products;

Previous wording

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland 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 23 offices (including its main office in Hoquiam). At June 30, 2024, the Company had total assets of $1.90 billion, net loans receivable of $1.40 billion, total deposits of $1.63 billion and total shareholders’ equity of $241.22 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the unaudited consolidated financial statements and related data, relates primarily to the Bank's operations.

Current wording

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland 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 23 offices (including its main office in Hoquiam). At December 31, 2024, the Company had total assets of $1.91 billion, net loans receivable of $1.41 billion, total deposits of $1.63 billion and total shareholders’ equity of $249.20 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the unaudited consolidated financial statements and related data, relates primarily to the Bank's operations.

Previous wording

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, through July 2023, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, to a range of 5.25% to 5.50%, where it remained as of June 30, 2024.

Current wording

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, through July 2023, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve had increased the target range for the federal funds rate by 525 basis points, to a range of 5.25% to 5.50%. Inflation has decreased over the last year and as a result, the Federal Reserve has decreased the target range by 100 basis points in the last four months, to a range of 4.25% to 4.50% at December 31, 2024.

Previous wording

The provision for (recapture of) credit losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The ACL on loans reflects the amount that management has determined is adequate to cover probable expected credit losses in the loan portfolio. As the loan portfolio increases, or due to an increase in probable expected losses inherent in the loan portfolio, the ACL may increase, resulting in a decrease to net interest income after the provision. Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to ACL on loans due to loan growth or an increase in the probable expected credit losses. The Company recorded a provision for credit losses on loans of $264,000 and $810,000 for the three and nine months ended June 30, 2024, respectively (using the CECL methodology), primarily due to loan portfolio growth. The Company recorded a provision for loan losses (using the prior incurred loss methodology) of $610,000 and $1.61 million for the three and nine months ended June 30, 2023, respectively.

Current wording

The provision for (recapture of) credit losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The ACL on loans reflects the amount that management has determined is adequate to cover probable expected credit losses in the loan portfolio. As the loan portfolio increases, or due to an increase in probable expected losses inherent in the loan portfolio, the ACL may increase, resulting in a decrease to net interest income after the provision. Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to the ACL on loans due to loan growth or an increase in the probable expected credit losses. The Company recorded a provision for credit losses on loans of $52,000 and $379,000 for the three months ended December 31, 2024 and 2023, respectively, primarily due to loan portfolio growth.

Previous wording

Net income is also affected by non-interest income and non-interest expense. For the three and nine months ended June 30, 2024, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, BOLI net earnings, servicing income on loans sold, escrow fees and other operating income. Non-interest income is also increased by net recoveries on investment securities and for periods prior to the adoption of CECL reduced by net OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any. Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses. Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.

Current wording

Net income is also affected by non-interest income and non-interest expense. For the three months ended December 31, 2024, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, BOLI net earnings, servicing income on loans sold, escrow fees and other operating income. Non-interest income is also increased by net recoveries on investment securities and recoveries of prior OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any. Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, technology and communications expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses. In certain periods, non-interest expense may be reduced by gains on the sale of premises and equipment and OREO. Both non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.

Previous wording

The Company's critical accounting estimates are described in the Company’s 2023 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. Other than the adoption of CECL (for additional information on CECL, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”), there have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K.

Current wording

The Company's critical accounting estimates are described in the Company’s 2024 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2024 Form 10-K.

Previous wording

Total deposits increased by $67.61 million, or 4.3%, to $1.63 billion at June 30, 2024 from $1.56 billion at September 30, 2023, primarily due to increases in money market account and certificates of deposit balances. These increases were partially offset by decreases in NOW checking account, non-interest bearing deposit and savings account balances.

Current wording

Total deposits decreased by $17.25 million, or 1.0%, to $1.63 billion at December 31, 2024 from $1.65 billion at September 30, 2024, primarily due to decreases in money market, non-interest bearing and NOW checking account balances. These decreases were partially offset by increases in certificate of deposit ("CDs") and savings account balances.

Previous wording

Shareholders’ equity increased by $8.15 million, or 3.5%, to $241.22 million at June 30, 2024 from $233.07 million at September 30, 2023. The increase in shareholders' equity was primarily due to net income, a reduction in accumulated other comprehensive loss and proceeds from stock option exercises during the current period. These increases were partially offset by the payment of dividends to common shareholders, repurchases of common stock and a reduction of retained earnings related to adoption of the new CECL accounting standard during the nine months ended June 30, 2024.

Current wording

Shareholders’ equity increased by $3.79 million, or 1.5%, to $249.20 million at December 31, 2024 from $245.41 million at September 30, 2024. The increase was primarily due to net income and proceeds from stock option exercises during the current period. These increases were partially offset by the payment of dividends to common shareholders, repurchases of common stock and an other comprehensive loss during the three months ended December 31, 2024.

Previous wording

Investment Securities: Investment securities (including investments in equity securities) decreased by $60.65 million, or 19.4%, to $252.15 million at June 30, 2024 from $312.80 million at September 30, 2023. This decrease was primarily due to maturities, prepayments and scheduled amortizations exceeding purchases. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Current wording

Investment Securities: Investment securities (including investments in equity securities) decreased by $11.19 million, or 4.6%, to $234.03 million at December 31, 2024 from $245.22 million at September 30, 2024. This decrease was primarily due to maturities, prepayments and scheduled amortizations. Partially offsetting these decreases was the purchase of additional U.S. government agency mortgage-backed investment securities and U.S. Treasury investment securities, all of which were classified as available for sale. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Previous wording

Loan originations decreased by $69.92 million, or 25.8%, to $202.62 million for the nine months ended June 30, 2024 from $272.54 million for the nine months ended June 30, 2023. The decrease in loan originations was primarily due to a decrease in construction, commercial real estate, one- to four-family and commercial business loans originated. The decrease was partially offset by increases in multi-family and land loan originations. The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four-family loans increased by $2.17 million, or 31.1%, to $9.12 million for the nine months ended June 30, 2024 from $6.96 million for the nine months ended June 30, 2023, primarily due to an increase in one- to four-family construction loans refinancing to permanent loans and being sold into the secondary market.

Current wording

Loan originations decreased by $16.86 million, or 19.1%, to $72.07 million for the three months ended December 31, 2024 from $88.93 million for the three months ended December 31, 2023. The decrease in loan originations was primarily due to a decrease in multi-family, commercial business, one- to four-family and consumer loans originated. The decrease was partially offset by an increase in construction loan originations. The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four- family loans decreased by $1.48 million, or 39.08%, to $2.31 million for the three months ended December 31, 2024 from $9.60 million for the three months ended December 31, 2023, primarily due to a decrease in one- to four-family construction loans refinancing to permanent loans and being sold into the secondary market.

Previous wording

Premises and Equipment: Premises and equipment decreased by $84,000, or 0.4%, to $21.56 million at June 30, 2024 from $21.64 million at September 30, 2023. This decrease was primarily due to scheduled depreciation that was partially offset by additions from remodeling projects.

Current wording

Premises and Equipment: Premises and equipment increased by $131,000, or 0.6%, to $21.62 million at December 31, 2024 from $21.49 million at September 30, 2024. This increase was primarily due to additions from remodeling projects, partially offset by scheduled depreciation.

Previous wording

OREO (Other Real Estate Owned): At June 30, 2024, total OREO and other repossessed assets consisted of one land parcel with no recorded value. At September 30, 2023, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

Current wording

OREO (Other Real Estate Owned): At December 31, 2024, total OREO and other repossessed assets consisted of one commercial real estate property with a value of $221,000 and one land parcel with no recorded value. At September 30, 2024 total OREO and other repossessed assets consisted of one land parcel with no recorded value.

Previous wording

BOLI (Bank Owned Life Insurance): BOLI increased by $470,000, or 2.0%, to $23.44 million at June 30, 2024 from $22.97 million at September 30, 2023. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Current wording

BOLI (Bank Owned Life Insurance): BOLI increased by $166,000, or 0.7%, to $23.78 million at December 31, 2024 from $23.61 million at September 30, 2024. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Previous wording

Goodwill and CDI: The recorded amount of goodwill remained unchanged at $15.13 million at both June 30, 2024 and September 30, 2023. CDI decreased by $169,000, or 25.0%, to $508,000 at June 30, 2024 from $677,000 at September 30, 2023 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Current wording

Goodwill and CDI: The recorded amount of goodwill remained unchanged at $15.13 million at both December 31, 2024 and September 30, 2023. CDI decreased by $45,000, or 10.0%, to $406,000 at December 31, 2024 from $451,000 at September 30, 2024 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Previous wording

Loan Servicing Rights, Net: Loan servicing rights, net decreased by $598,000, or 28.15%, to $1.53 million at June 30, 2024 from $2.12 million at September 30, 2023 primarily due to the amortization of servicing rights. The principal amount of loans serviced for Freddie Mac and SBA decreased by $14.27 million to $372.23 million at June 30, 2024 from $386.50 million at September 30, 2023.

Current wording

Loan Servicing Rights, Net: Loan servicing rights, net decreased by $177,000, or 12.90%, to $1.20 million at December 31, 2024 from $1.37 million at September 30, 2024 primarily due to the amortization of servicing rights. The principal amount of loans serviced for Freddie Mac and SBA decreased by $7.46 million to $363.10 million at December 31, 2024 from $370.56 million at September 30, 2024.

Previous wording

Deposits: Deposits increased by $67.61 million, or 4.3%, to $1.63 billion at June 30, 2024 from $1.56 billion at September 30, 2023. The increase was primarily due to a $137.29 million increase in money market account balances and a $61.44 million increase in certificates of deposit balances. These increases were partially offset by a $61.94 million decrease in NOW checking accounts balances, a $48.74 million decrease in non-interest bearing demand account balances and a $20.45 million decrease in savings account balances. The increase in money market account balances was primarily due to several larger balance increases with commercial customers.

Current wording

Deposits: Deposits decreased by $17.25 million, or 1.0%, to $1.63 billion at December 31, 2024 from $1.65 billion at September 30, 2024. The decrease was primarily due to a $15.51 million decrease in money market account balances, a $10.21 million decrease in non-interest bearing demand account balances and a $9.91 million decrease in NOW checking accounts balances in part due to some larger customers ending the calendar year with lower balances. These decreases were partially offset by a $17.53 million increase in certificates of deposit account balances and a $852,000 increase in savings account balances.

Previous wording

FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings decreased to $20.00 million at June 30, 2024, from $35.00 million at September 30, 2023. The borrowings consist of one $5.00 million short-term borrowing, with a scheduled maturity in September 2024, that bears interest at 5.52%, and one $5.00 million borrowing and one $10.00 million borrowing with scheduled maturities in May 2026, both of which bear interest at 3.95%.

Current wording

FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings remained constant at $20.00 million at both December 31, 2024 and September 30, 2024. The borrowings consist of three long-term borrowings: two totaling $15.00 million with scheduled maturities in May 2026, both bearing interest at 3.95%, and one $5.00 million borrowing maturing in August 2026 with an interest rate of 4.03%.

Previous wording

Shareholders’ Equity: Total shareholders’ equity increased by $8.15 million, or 3.5%, to $241.22 million at June 30, 2024 from $233.07 million at September 30, 2023. The increase was primarily due to net income of $17.93 million, proceeds of $395,000 from the exercise of stock options and a $539,000 reduction in the accumulated other comprehensive loss for the fair value adjustment on available for sale investment securities. This increase was partially offset by dividend payments to common shareholders of $5.74 million, the repurchase of 182,117 shares of the Company's common stock for $4.80 million and a $488,000 adjustment to equity for the adoption of the new CECL accounting standard.

Current wording

Shareholders’ Equity: Total shareholders’ equity increased by $3.79 million, or 1.5%, to $249.20 million at December 31, 2024 from $245.41 million at September 30, 2024. The increase was primarily due to net income of $6.86 million and proceeds of $474,000 from the exercise of stock options. This increase was partially offset by dividend payments to common shareholders of $1.99 million, the repurchase of 27,404 shares of the Company's common stock for $884,000 and an $812,000 other comprehensive loss for fair value adjustment on available for sale investment securities.

Previous wording

Non-performing assets to total assets was 0.22% at June 30, 2024 and 0.09% at September 30, 2023. Non-performing assets increased by $2.60 million, or 162.7%, to $4.19 million at June 30, 2024 from $1.60 million at September 30, 2023. The increase in non-performing assets was primarily due to a $2.61 million increase in non-accrual loans, with the largest increases occurring in the commercial business and commercial real estate portfolios.

Current wording

Non-performing assets to total assets was 0.16% at December 31, 2024 and 0.20% at September 30, 2024. Non-performing assets decreased by $937,000, or 23.8%, to $3.00 million at December 31, 2024 from $3.94 million at September 30, 2023. The decrease was primarily due to a $1.15 million decrease in non-accrual loans, with the largest decreases occurring in the commercial business and commercial real estate portfolios. These decreases were partially offset by a $221,000 increase in OREO.

Previous wording

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2024 and 2023

Current wording

Comparison of Operating Results for the Three Months Ended December 31, 2024 and 2023

Previous wording

Net income decreased by $382,000, or 6.1%, to $5.92 million for the quarter ended June 30, 2024 from $6.31 million for the quarter ended June 30, 2023. Net income per diluted common share decreased by $0.03, or 3.9%, to $0.74 for the quarter ended June 30, 2024 from $0.77 for the quarter ended June 30, 2023. The decreases in net income and net income per diluted common share for the three months ended June 30, 2024, were primarily due to a $653,000 decrease in net interest income, a $142,000 increase in non-interest expense and an $84,000 decrease in non-interest income. These decreases were partially offset by a $366,000 decrease in the provision for credit losses and a $131,000 decrease in the provision for income taxes.

Current wording

Net income increased by $564,000, or 9.0%, to $6.86 million for the quarter ended December 31, 2024 from $6.30 million for the quarter ended December 31, 2023. Net income per diluted common share increased by $0.09, or 11.7%, to $0.86 for the quarter ended December 31, 2024 from $0.77 for the quarter ended December 31, 2023. The increases in net income and net income per diluted common share for the three months ended December 31, 2024, were primarily due to a $966,000 increase in net interest income and a $309,000 decrease in the provision for credit losses. These increases were partially offset by a $443,000 increase in non-interest expense, a $167,000 increase in the provision for income taxes and $101,000 decrease in non-interest income.

Previous wording

Net Interest Income: Net interest income decreased by $653,000, or 3.9%, to $15.98 million for the quarter ended June 30, 2024 from $16.63 million for the quarter ended June 30, 2023. This decrease was due to an increase in the weighted average cost of interest-bearing liabilities to 2.64% at June 30, 2024 from 1.22% at June 30, 2023 and, to a lesser extent, a $169.73 million increase in the average balance of total interest-bearing liabilities. Partially offsetting the increase in funding costs, was an increase in the average yields of interest-earning assets to 5.33% for the current quarter from 4.72% for the quarter ended June 30, 2023 and a $134.73 million increase in average total interest-earning assets.

Current wording

Net Interest Income: Net interest income increased by $966,000, or 6.0%, to $16.97 million for the quarter ended December 31, 2024 from $16.00 million for the quarter ended December 31, 2023. This increase was due to a 35 basis point increase in the weighted average yield of interest-earning assets to 5.42% at December 31, 2024 from 5.07% at December 31, 2023 and to a $75.76 million increase in average total interest-earning assets. Partially offsetting the increase in the yield on interest-earning assets, was a a 40 basis point increase in the average cost of interest-bearing liabilities to 2.62% for the current quarter from 2.22% for the quarter ended December 31, 2023 and a $94.91 million increase in average total interest-bearing liabilities.

Previous wording

Total interest and dividend income increased by $4.25 million, or 21.4%, to $24.14 million for the quarter ended June 30, 2024 from $19.89 million for the quarter ended June 30, 2023, primarily due to increases in the average yield and average balance of loans receivable and interest-bearing deposits in banks and CDs, and the average yield on investment securities. These increases were partially offset by a decrease in the average balance of investment securities.

Current wording

Total interest and dividend income increased by $2.76 million, or 12.3%, to $25.26 million for the quarter ended December 31, 2024 from $22.50 million for the quarter ended December 31, 2023, primarily due to increases in the average yield earned on and average balance of loans receivable, as well as an increase in the average balance of interest-bearing deposits in banks and CDs and a higher average yield on investment securities. These increases were partially offset by a decrease in the average balance of investment securities and, to a lesser extent, a decrease in the average rate paid on interest-bearing deposits in banks and CDs.

Previous wording

The average balance of total interest-earning assets increased by $134.73 million, or 8.0%, to $1.82 billion for the quarter ended June 30, 2024 from $1.69 billion for the quarter ended June 30, 2023. The average balance of loans receivable increased by $137.54 million, or 11.0% and the average balance of interest-bearing deposits in banks and CDs increased by $59.62 million or 58.6%. These increases were partially offset by a decrease in the average balance of investment securities of $61.76 million or 19.0% between the periods. During the quarter ended June 30, 2024, there was a total of $133,000 of pre-payment penalties, non-accrual interest and late fees collected compared to $87,000 collected for the quarter ended June 30, 2023. The average yield on interest-earning assets increased by 61 basis points to 5.33% for the quarter ended June 30, 2024 from 4.72% for the quarter ended June 30, 2023. The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 62 basis points and 63 basis points to 5.41% and 3.57%, for the quarter ended June 30, 2024 compared to the quarter ended June 30, 2023, respectively, while the average yield on loans receivable increased 48 basis points to 5.65% during the same period.

Current wording

The average balance of total interest-earning assets increased by $75.76 million, or 4.3%, to $1.85 billion for the quarter ended December 31, 2024 from $1.78 billion for the quarter ended December 31, 2023. The average balance of loans receivable increased by $105.17 million, or 7.9%, and the average balance of interest-bearing deposits in banks and CDs increased by $40.51 million or 32.1%. These increases were partially offset by a decrease in the average balance of investment securities of $68.84 million or 22.2% between the periods. During the quarter ended December 31, 2024, there was a total of $123,000 of pre-payment penalties, non-accrual interest and late fees collected compared to $142,000 collected for the quarter ended December 31, 2023. The average yield on interest-earning assets increased by 35 basis points to 5.42% for the quarter ended December 31, 2024 from 5.07% for the quarter ended December 31, 2023. The average yield on investment securities increased 55 basis points to 3.51% for the quarter ended December 31, 2024 compared to the quarter ended December 31, 2023, while the average yield on loans receivable increased 28 basis points to 5.8% during the same period.

Previous wording

Total interest expense increased by $4.90 million, or 150.6%, to $8.16 million for the quarter ended June 30, 2024 from $3.26 million for the quarter ended June 30, 2023. The increase in interest expense was due to an increase in the average cost and, to a lesser extent, an increase in the average balance of interest-bearing liabilities, primarily deposits. The average cost of interest-bearing liabilities increased to 2.64% for the quarter ended June 30, 2024 from 1.22% for the quarter ended June 30, 2023. The average balance of interest-bearing liabilities increased by $169.73 million, or 15.8%, to $1.24 billion for the quarter ended June 30, 2024 from $1.07 billion for the quarter ended June 30, 2023, primarily due to increases in the average balances of money market accounts, certificate of deposit accounts and borrowings, partially offset by decreases in the average balance of NOW checking and savings accounts.

Current wording

Total interest expense increased by $1.80 million, or 27.6%, to $8.29 million for the quarter ended December 31, 2024 from $6.49 million for the quarter ended December 31, 2023. This increase was due to an increase in the average balance and, to a lesser extent, an increase in the average cost of interest-bearing liabilities, primarily deposits. The average balance of interest-bearing liabilities increased by $94.91 million, or 8.2%, to $1.26 billion for the quarter ended December 31, 2024 from $1.16 billion for the quarter ended December 31, 2023, primarily due to increases in the average balances of money market and certificate of deposit accounts, partially offset by decreases in the average balance of NOW checking accounts. The average cost of interest-bearing liabilities increased to 2.62% for the quarter ended December 31, 2024 from 2.22% for the quarter ended December 31, 2023.

Previous wording

As a result of increases in interest expense, the net interest margin ("NIM") decreased to 3.53% for the quarter ended June 30, 2024 from 3.94% for the quarter ended June 30, 2023.

Current wording

As a result of changes above, the net interest margin ("NIM") increased to 3.64% for the quarter ended December 31, 2024 from 3.60% for the quarter ended December 31, 2023.

Previous wording

Provision for Credit Losses: A $244,000 provision for credit losses was recorded for the quarter ended June 30, 2024, consisting of a $264,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $12,000 recapture of credit losses on investment securities, and an $8,000 recapture of credit losses on unfunded commitments which was primarily due to a decrease in the balance of unfunded loan commitments. A $610,000 provision for loan losses, under the prior incurred loan loss method, was recorded for the quarter ended June 30, 2023.

Current wording

Provision for Credit Losses: A $27,000 provision for credit losses was recorded for the quarter ended December 31, 2024, consisting of a $52,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $5,000 recapture of credit losses on investment securities, and a $20,000 recapture of credit losses on unfunded commitments which was primarily due to a decrease in the balance of unfunded loan commitments. A $336,000 provision for credit losses was recorded for the quarter ended December 31, 2023, consisting of a $379,000 provision for credit losses on loans, a $10,000 recapture of credit losses on investment securities and a $33,000 recapture of credit losses on unfunded commitments.

Previous wording

For the quarter ended June 30, 2024, net charge-offs were $36,000 compared to $1,000 for the quarter ended June 30, 2023. Non-accrual loans increased by $2.61 million, or 172.1%, to $4.12 million at June 30, 2024 from $1.51 million at September 30, 2023. At June 30, 2024, non-accrual loans increased by $2.53 million, or 159.8%, to $4.12 million from $1.59 million at June 30, 2023. Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $2.57 million, or 154.3%, to $4.23 million at June 30, 2024, from $1.67 million at September 30, 2023 and increased by $2.39 million, or 129.7%, from $1.84 million one year ago.

Current wording

For the quarter ended December 31, 2024, net charge-offs were $242,000 compared to $2,000 for the quarter ended December 31, 2023. Non-accrual loans decreased by $1.15 million, or 29.7%, to $2.73 million at December 31, 2024 from $3.89 million at September 30, 2024, and decreased by $633,000, or 18.8%,from $3.36 million at December 31, 2023. Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $459,000, or 10.2%, to $4.02 million at December 31, 2024, from $4.48 million at September 30, 2024 and increased by $417,000, or 11.6%, from $3.60 million one year ago.

Previous wording

In accordance with GAAP, acquired loans are recorded at their estimated fair value, resulting in a net discount to the loans' contractual amounts, with a portion of this discount reflecting possible credit losses. Credit discounts are included in the determination of fair value. With the adoption of CECL, purchased loans are evaluated for impairment in the same manner as the rest of the loan portfolio. The remaining fair value discount associated with acquired loans was $163,000 at June 30, 2024. This discount will continue to accrete into income as these loans continue to pay down.

Current wording

In accordance with GAAP, acquired loans are recorded at their estimated fair value, resulting in a net discount to the loans' contractual amounts, with a portion of this discount reflecting possible credit losses. Credit discounts are included in the determination of fair value. With the adoption of CECL, purchased loans are evaluated for impairment in the same manner as the rest of the loan portfolio. The remaining fair value discount associated with acquired loans was $147,000 at December 31, 2024. This discount will continue to accrete into income as these loans continue to pay down.

Previous wording

Non-interest Income: Total non-interest income decreased by $84,000, or 2.9%, to $2.79 million for the quarter ended June 30, 2024 from $2.88 million for the quarter ended June 30, 2023. This decrease was primarily due to a $95,000 decrease in gain on sales of investment securities and a $38,000 decrease in ATM and debit card interchange transaction fees. These decreases were partially offset by a $44,000 increase in service charges on deposits.

Current wording

Non-interest Income: Total non-interest income decreased by $101,000, or 3.6%, to $2.70 million for the quarter ended December 31, 2024 from $2.80 million for the quarter ended December 31, 2023. This decrease was primarily due to a $52,000 decrease in other, net non-interest income, largely due to a $63,000 decrease in the fair value of investments in equity securities, $35,000 decrease in gain on sales loans and a $24,000 decrease in service charges on deposits. These decreases were partially offset by a $10,000 increase in BOLI net earnings.

Previous wording

Non-interest Expense: Total non-interest expense increased by $142,000, or 1.3%, to $11.07 million for the quarter ended June 30, 2024 from $10.93 million for the quarter ended June 30, 2023. This increase was primarily due to increased expenses of $142,000 in technology and communications, $89,000 in ATM and debit card interchange transaction fees and $68,000 in salary and employee benefits, which were partially offset by a $242,000 decrease in professional fees. The efficiency ratio for the current quarter was 58.97% compared to 56.01% for the comparable quarter one year ago. The change in the efficiency ratio was due to lower total revenue coupled with slightly higher non-interest expense.

Current wording

Non-interest Expense: Total non-interest expense increased by $443,000, or 4.2%, to $11.07 million for the quarter ended December 31, 2024 from $10.62 million for the quarter ended December 31, 2023. This increase was primarily due to increased expenses of $181,000 in salary and employee benefits, due to annual salary increases, $166,000 in technology and communications due to increased usage charges, $93,000 in professional fees mainly due to additional costs related to CECL, and $79,000 in other non-interest expenses. These increases were partially offset by a $94,000 decrease in ATM and debit card interchange transaction fees as a result of a decrease in fraud charges. The efficiency ratio for the current quarter was 56.27% compared to 56.50% for the comparable quarter one year ago. The slight improvement in the efficiency ratio was due to higher overall revenue, which was partially offset by higher non-interest expense.

Previous wording

The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At June 30, 2024, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 12.49%. The Bank maintains a credit facility with the FHLB that provides for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral. At June 30, 2024, the Bank had a total of $602.28 million available for borrowings with the FHLB of which $20.00 million was outstanding. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral: Borrower-in-Custody ("BIC"). At June 30, 2024, the Bank had no outstanding balance on the BIC line, under which $83.17 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At June 30, 2024, the Bank did not have an outstanding balance on this borrowing line. Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Current wording

The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At December 31, 2024, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 12.92%. The Bank maintains a credit facility with the FHLB that provides for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral. At December 31, 2024, the Bank had a total of $599.34 million available for borrowings with the FHLB of which $20.00 million was outstanding. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral: Borrower-in-Custody ("BIC"). At December 31, 2024, the Bank had no outstanding balance on the BIC line, under which $77.14 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At December 31, 2024, the Bank did not have an outstanding balance on this borrowing line. Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Previous wording

The Bank's primary investing activity is the origination of loans and, to a lesser extent, the purchase of investment securities. During the nine months ended June 30, 2024 and 2023, the Bank originated $202.62 million and $272.54 million of loans, respectively. At June 30, 2024, the Bank had undisbursed lines of credit and commitments to extend credit totaling $132.33 million and undisbursed construction loans in process totaling $87.20 million. Investment securities purchased during the nine months ended June 30, 2024 and 2023 totaled $38.01 million and $32.60 million, respectively.

Current wording

The Bank's primary investing activity is the origination of loans and, to a lesser extent, the purchase of investment securities. During the three months ended December 31, 2024 and 2023, the Bank originated $72.07 million and $88.93 million of loans, respectively. At December 31, 2024, the Bank had undisbursed lines of credit and commitments to extend credit totaling $131.54 million and undisbursed construction loans in process totaling $85.35 million. Investment securities purchased during the three months ended December 31, 2024 and 2023 totaled $8.58 million and $1.92 million, respectively.

Previous wording

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the nine months ended June 30, 2024 and 2023, the Bank sold $14.92 million and $6.96 million, respectively, in loans and loan participation interests. During the nine months ended June 30, 2024 and 2023, the Bank received $105.43 million and $130.21 million in principal repayments, respectively.

Current wording

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the three months ended December 31, 2024 and 2023, the Bank sold $2.31 million and $9.60 million, respectively, in loans and loan participation interests. During the three months ended December 31, 2024 and 2023, the Bank received $65.16 million and $44.35 million in principal repayments, respectively.

Previous wording

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment, and investment securities available for sale (including equity securities) increased to $244.72 million at June 30, 2024 from $186.49 million at September 30, 2023. CDs that are scheduled to mature in less than one year from June 30, 2024 totaled $294.44 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Current wording

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment, and investment securities available for sale (including equity securities) increased to $249.46 million at December 31, 2024 from $248.06 million at September 30, 2024. CDs that are scheduled to mature in less than one year from December 31, 2024 totaled $327.38 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Previous wording

Based on current objectives, there are no capital expenditures projected for the remaining three months of the fiscal year ending September 30, 2024 that would materially impact liquidity. For the remainder of the 2024 fiscal year, the Bank projects that fixed commitments will include $83,000 of operating lease payments. Further, one FHLB borrowing totaling $5.00 million will mature during the fiscal year 2024. In addition, at June 30, 2024, there were other future obligations and accrued expenses of $9.21 million.

Current wording

Based on current objectives, there are no capital expenditures projected for the remaining nine months of the fiscal year ending September 30, 2025 that would materially impact liquidity. For the remainder of the 2025 fiscal year, the Bank projects that fixed commitments will include $253,000 of operating lease payments. No FHLB borrowings are scheduled to mature during fiscal year 2025. In addition, at December 31, 2024, there were other future obligations and accrued expenses of $8.36 million.

Previous wording

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At June 30, 2024, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $214,000.

Current wording

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At December 31, 2024, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.73 million.

Previous wording

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is $0.24 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during fiscal year 2024 at the rate of $0.24 per share, the average total dividend paid each quarter would be approximately $1.91 million based on the number of current outstanding shares at June 30, 2024 (which assumes no change in the number of shares).

Current wording

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is $0.25 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during fiscal year 2025 at the rate of $0.25 per share, the average total dividend paid each quarter would be approximately $1.99 million based on the number of current outstanding shares at December 31, 2024 (which assumes no change in the number of shares).

Previous wording

In addition, from time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On July 25, 2023, the Company announced the adoption of a new stock repurchase program pursuant to which the Company may repurchase up to 404,708 shares of Company common stock, of which 192,025 shares remained available for future purchases as of June 30, 2024. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.

Current wording

In addition, from time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On July 25, 2023, the Company announced the adoption of a new stock repurchase program pursuant to which the Company may repurchase up to 404,708 shares of Company common stock, of which 127,762 shares remained available for future purchases as of December 31, 2024. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.