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 months ended December 31, 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 and six months ended March 31, 2025.

Previous wording

Certain matters discussed in this Quarterly Report on Form 10-Q 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, plans, 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 economic 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:

Current wording

"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 economic 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:

Previous wording

•changes in the interest rate environment, including the past increases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration of such increased levels, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

Current wording

•changes in the interest rate environment, including increases or decreases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration of such levels, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;

Previous wording

•results of examinations of us by regulatory authorities, which may the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our ACL, 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;

Current wording

•results of examinations of us by regulatory authorities, which may the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for credit losses ("ACL"), 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;

Previous wording

•The potential imposition of new tariffs or changes to existing trade policies that could affect economic activity or specific industry sectors;

Current wording

•the potential for new or increased tariffs, trade restrictions or geopolitical tensions that could affect economic activity or specific industry sectors

Previous wording

Any of the forward-looking statements that we make in this Form 10-Q 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 quarterly 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 2025 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.

Current wording

Any of the forward-looking statements that we make in this Form 10-Q 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 quarterly 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.

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 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.

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 March 31, 2025, the Company had total assets of $1.93 billion, net loans receivable of $1.42 billion, total deposits of $1.65 billion and total shareholders’ equity of $252.52 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 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.

Current wording

Our net interest income, net interest margin, and net interest spread are primarily influenced by changes in market interest rates, the shape of the yield curve, and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities. These components of net interest income are also affected by the volume and composition of our interest-earning assets, interest-bearing and non-interest-bearing liabilities, and shareholders’ equity. During the first fiscal quarter of 2025, interest rate trends were significantly influenced by monetary policy actions taken by the Federal Open Market Committee (“FOMC”) of the Federal Reserve. In response to ongoing improvements in inflation, the FOMC lowered the target range for the federal funds rate three times during 2024, resulting in a range of 4.25% to 4.50% at March 31, 2025. Despite the decline in market rates, asset yields increased due to the origination of new loans at higher rates and upward repricing of adjustable-rate loans. At the same time, funding costs declined, but at a slower pace, which moderated the overall benefit to our net interest margin.

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 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.

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 $237,000 and $289,000 for the three and six months ended March 31, 2025, respectively, primarily due to changes in the composition of the portfolio. The Company recorded a provision for credit losses on loans of $166,000 and $545,000 for the three and six months ended March 31, 2024, respectively.

Previous 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.

Current wording

Net income is also impacted by levels of non-interest income and non-interest expense. For the three and six months ended March 31, 2025, 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 may also be affected by net recoveries on investment securities and the reversal of previously recognized OTTI losses, if applicable. Additionally, it is reduced by valuation allowances on loan servicing rights and increased by recoveries of such allowances, when recognized. Non-interest expense for the same periods primarily included salaries and employee benefits, premises and equipment costs, 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-related expenses, technology and communications expenses, deposit operation expenses, amortization of CDI, and other general operating expenses. In certain periods, non-interest expense may be offset by gains on the sale of premises and equipment or OREO. Both non-interest income and non-interest expense are influenced by the Company’s overall growth and the expansion of its loan and deposit account base.

Previous wording

General: Total assets decreased by $14.00 million, or 0.7%, to $1.91 billion at December 31, 2024 from $1.92 billion at September 30, 2024. The decrease in total assets was primarily due to decreases in loans receivable and investment securities, which were partially offset by increases in several other asset categories.

Current wording

General: Total assets increased by $9.26 million, or 0.5%, to $1.93 billion at March 31, 2025 from $1.92 billion at September 30, 2024. The increase was primarily due to increases cash and cash equivalents and other assets which were partially offset by decreases in investment securities and in several other asset categories.

Previous wording

Net loans receivable decreased by $9.70 million, or 0.7%, to $1.41 billion at December 31, 2024 from $1.42 billion at September 30, 2024, primarily due to decreases in commercial business and commercial real estate loans, as well as construction loans due to an increase in the undisbursed portion of construction loans. Smaller declines in several other loan categories also contributed to the overall decrease. These decreases were partially offset by an increase in one- to four-family loans and in several other loan categories.

Current wording

Net loans receivable decreased by $1.45 million, or 0.1%, to $1.42 billion at March 31, 2025 from $1.42 billion at September 30, 2024, primarily due to decreases in construction and commercial business loans as well as smaller decreases in other loan categories. These decreases were partially offset by an increase in one- to four-family loans and smaller increases in other loan categories.

Previous 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.

Current wording

Total deposits increased by $3.16 million, or 0.2%, to $1.65 billion at March 31, 2025 from $1.65 billion at September 30, 2024, primarily due to increases in certificates of deposit "CDs" and savings account balances. These increases were partially offset by decreases in money market, non-interest-bearing and NOW checking account balances.

Previous 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.

Current wording

Shareholders’ equity increased by $7.11 million, or 2.9%, to $252.52 million at March 31, 2025 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 six months ended March 31, 2025.

Previous wording

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by $3.40 million, or 1.9%, to $171.54 million at December 31, 2024 from $174.94 million at September 30, 2024. The decrease was due to a $2.74 million decrease in CDs held for investments and a $657,000 decrease in cash and cash equivalents, which was used to fund deposit withdrawals.

Current wording

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment increased by $24.99 million, or 14.3%, to $199.92 million at March 31, 2025 from $174.94 million at September 30, 2024. The increase was due to a $26.48 million increase in cash and cash equivalents, resulting primarily from maturities, prepayments and scheduled amortizations of investment securities as well as an increase in deposits. The overall increase was partially offset by a $1.50 million decrease in CDs held for investment.

Previous 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.”

Current wording

Investment Securities: Investment securities (including investments in equity securities) decreased by $18.60 million, or 7.6%, to $226.61 million at March 31, 2025 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

Loans: Net loans receivable decreased by $9.70 million, or 0.7%, to $1.41 billion at December 31, 2024 from $1.42 billion at September 30, 2024. The decrease was primarily due to a $3.43 million decrease in commercial business loans, a $2.17 million decrease in commercial real estate loans and a $13.92 million decrease in construction loans due to a $15.47 million increase in the undisbursed portion of construction loans. These decreases were partially offset by a $7.32 million increase in one- to four-family loans, and smaller increases in other loan categories.

Current wording

Loans: Net loans receivable decreased by $1.45 million, or 0.1%, to $1.42 billion at March 31, 2025 from $1.42 billion at September 30, 2024. The decrease was primarily due to an $11.02 million decrease in construction loans, including a $5.16 million increase in the undisbursed portion of construction loans, a $7.60 million decrease in commercial business loans, and smaller decreases in other loan categories. These decreases were partially offset by a $16.30 million increase in one- to four-family loans, and smaller increases in other loan categories.

Previous 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.

Current wording

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 $1.41 million, or 23.25%, to $7.49 million for the six months ended March 31, 2025 from $6.07 million for the six months ended March 31, 2024, primarily due to an increase 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 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.

Current wording

Premises and Equipment: Premises and equipment decreased by $50,000, or 0.2%, to $21.44 million at March 31, 2025 from $21.49 million at September 30, 2024. This decrease was primarily due to scheduled depreciation.

Previous 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.

Current wording

BOLI (Bank Owned Life Insurance): BOLI increased by $331,000, or 1.4%, to $23.94 million at March 31, 2025 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 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.”

Current wording

Goodwill and CDI: The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2025 and September 30, 2024. CDI decreased by $90,000, or 20.0%, to $361,000 at March 31, 2025 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 $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.

Current wording

Loan Servicing Rights, Net: Loan servicing rights, net decreased by $321,000, or 23.40%, to $1.05 million at March 31, 2025 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 the U.S. Small Business Administration decreased by $10.98 million to $359.58 million at March 31, 2025 from $370.56 million at September 30, 2024.

Previous 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.

Current wording

Deposits: Deposits increased by $3.16 million, or 0.2%, to $1.65 billion at March 31, 2025 from $1.65 billion at September 30, 2024. The increase was primarily due to a $32.98 million increase in certificates of deposit account balances and a $1.86 million increase in savings account balances. These increases were partially offset by a $26.37 million decrease in money market account balances, and a $5.31 million decrease in non-interest bearing demand 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 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%.

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 unchanged at $20.00 million at both March 31, 2025 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 $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.

Current wording

Shareholders’ Equity: Total shareholders’ equity increased by $7.11 million, or 2.9%, to $252.52 million at March 31, 2025 from $245.41 million at September 30, 2024. The increase was primarily due to net income of $13.62 million and proceeds of $686,000 from the exercise of stock options. This increase was partially offset by dividend payments to common shareholders of $3.98 million, the repurchase of 89,168 shares of the Company's common stock for $2.79 million and a $690,000 other comprehensive loss for fair value adjustment on available for sale investment securities, resulting from changes in market interest rates during the period..

Previous 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.

Current wording

Non-performing assets to total assets was 0.13% at March 31, 2025 and 0.20% at September 30, 2024. Non-performing assets decreased by $1.35 million, or 34.2%, to $2.59 million at March 31, 2025 from $3.94 million at September 30, 2024. The decrease was primarily due to a $1.56 million decrease in non-accrual loans, with the largest decreases occurring in the commercial real estate and commercial business portfolios. The decrease in both categories was a result of loan payoffs. These decreases were partially offset by a $221,000 increase in OREO and other repossessed assets.

Previous wording

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

Current wording

Comparison of Operating Results for the Three and Six Months Ended March 31, 2025 and 2024

Previous 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.

Current wording

Net income increased by $1.05 million, or 18.3%, to $6.76 million for the quarter ended March 31, 2025 from $5.71 million for the quarter ended March 31, 2024. Net income per diluted common share increased by $0.15, or 21.4%, to $0.85 for the quarter ended March 31, 2025 from $0.70 for the quarter ended March 31, 2024. The increases in net income and net income per diluted common share for the three months ended March 31, 2025, were primarily due to a $1.58 million increase in net interest income and a $72,000 increase in non-interest income. These increases were partially offset by a $235,000 increase in the provision for income taxes, a $203,000 increase in non-interest expense and $165,000 increase in the provision for credit losses.

Previous 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.

Current wording

Net Interest Income: Net interest income increased by $1.58 million, or 10.1%, to $17.21 million for the quarter ended March 31, 2025 from $15.64 million for the quarter ended March 31, 2024. This increase was due to a 32 basis point increase in the weighted average yield of interest-earning assets to 5.48% at March 31, 2025 from 5.16% at March 31, 2024, and a $34.16 million increase in average total interest-earning assets. To a lesser extent, a three basis point decrease in the average rate paid on interest-bearing liabilities, to 2.47% from 2.50%, also contributed to the improvement. These positive factors were partially offset by a $45.97 million increase in the average balance of total interest-bearing liabilities, which increased the Company’s overall funding costs.

Previous 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.

Current wording

Total interest and dividend income increased by $1.71 million, or 7.4%, to $24.87 million for the quarter ended March 31, 2025 from $23.16 million for the quarter ended March 31, 2024, 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 $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.

Current wording

The average balance of total interest-earning assets increased by $34.17 million, or 1.9%, to $1.84 billion for the quarter ended March 31, 2025 from $1.81 billion for the quarter ended March 31, 2024. The average balance of loans receivable increased by $70.58 million, or 5.2%, and the average balance of interest-bearing deposits in banks and CDs increased by $29.05 million, or 20.3%. These increases were partially offset by a decrease in the average balance of investment securities of $65.51 million, or 22.4% between the periods. During the quarter ended March 31, 2025, there was a total of $201,000 of pre-payment penalties, non-accrual interest and late fees collected compared to $99,000 collected for the quarter ended March 31, 2024. The average yield on interest-earning assets increased by 32 basis points to 5.48% for the quarter ended March 31, 2025 from 5.16% for the quarter ended March 31, 2024. The average yield on investment securities increased 49 basis points to 3.58% for the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024, while the average yield on loans receivable increased 33 basis points to 5.90% during the same period.

Previous 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.

Current wording

Total interest expense increased by $131,000, or 1.7%, to $7.65 million for the quarter ended March 31, 2025 from $7.52 million for the quarter ended March 31, 2024. This increase was due to an increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $45.97 million, or 3.8%, to $1.25 billion for the quarter ended March 31, 2025 from $1.21 billion for the quarter ended March 31, 2024, primarily due to increases in the average balances of certificate of deposit and money market accounts, partially offset by decreases in the average balance of NOW checking accounts. The average cost of interest-bearing liabilities decreased to 2.47% for the quarter ended March 31, 2025 from 2.50% for the quarter ended March 31, 2024.

Previous 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.

Current wording

As a result of changes above, the net interest margin ("NIM") increased to 3.79% for the quarter ended March 31, 2025 from 3.48% for the quarter ended March 31, 2024.

Previous 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.

Current wording

Provision for Credit Losses: A $246,000 provision for credit losses was recorded for the quarter ended March 31, 2025, consisting of a $237,000 provision for credit losses on loans which was primarily due to changes in the composition of the loan portfolio, a $5,000 recapture of credit losses on investment securities, and a $14,000 provision for credit losses on unfunded commitments which was primarily due to an increase in the balance of unfunded loan commitments. An $81,000 provision for credit losses was recorded for the quarter ended March 31, 2024, consisting of a $166,000 provision for credit losses on loans, a $3,000 provision for credit losses on investment securities and a $88,000 recapture of credit losses on unfunded commitments.

Previous 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.

Current wording

For the quarter ended March 31, 2025, net charge-offs were less than $1,000 compared to $3,000 for the quarter ended March 31, 2024. Non-accrual loans decreased by $1.56 million, or 40.1%, to $2.33 million at March 31, 2025 from $3.89 million at September 30, 2024, and decreased by $1.28 million, or 35.5%, from $3.61 million at March 31, 2024. Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $1.16 million, or 25.8%, to $3.32 million at March 31, 2025, from $4.48 million at September 30, 2024 and decreased by $878,000, or 20.9%, from $4.20 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 $147,000 at December 31, 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 $131,000 at March 31, 2025. 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 $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.

Current wording

Non-interest Income: Total non-interest income increased by $72,000, or 2.8%, to $2.69 million for the quarter ended March 31, 2025 from $2.62 million for the quarter ended March 31, 2024. This increase was primarily due to an $81,000 increase in gain on sale of loans, reflecting a higher volume of fixed-rate one- to four-family mortgages into the secondary market, and a $43,000 increase in other, net non-interest income, largely due to a $39,000 increase in the fair value of investments in equity securities. These increases were partially offset by a $36,000 decrease in ATM and debit card interchange fees, primarily due to lower transaction volumes, and a $29,000 decrease in service charges on deposits, attributed to reduced overdraft activity.

Previous 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.

Current wording

Non-interest Expense: Total non-interest expense increased by $203,000, or 1.8%, to $11.19 million for the quarter ended March 31, 2025 from $10.99 million for the quarter ended March 31, 2024. This increase was mainly due to a $112,000 increase in professional fee expense, an $81,000 increase in technology and communications expense, due to continued investment in digital banking platforms and cybersecurity enhancements, and a $30,000 increase in advertising expense. These increases were partially offset by an $80,000 decrease in ATM and debit card interchange transaction expense due to renegotiated vendor contracts and lower transaction volume and a $47,000 decrease in salary and employee benefits expense. The efficiency ratio for the current quarter was 56.25% compared to 60.22% for the comparable quarter one year ago. The improvement in the efficiency ratio was due to higher overall revenue, which was partially offset by higher non-interest expense.

Previous wording

Provision for Income Taxes: The provision for income taxes increased by $167,000, or 10.8%, to $1.71 million for the quarter ended December 31, 2024 from $1.55 million for the quarter ended December 31, 2023. The increase in the provision for income taxes was primarily due to higher pre-tax income. The Company's effective income tax rate was 20.0% for the quarter ended December 31, 2024 and 19.6% for the quarter ended December 31, 2023.

Current wording

Provision for Income Taxes: The provision for income taxes increased by $235,000, or 16.0%, to $1.71 million for the quarter ended March 31, 2025 from $1.47 million for the quarter ended March 31, 2024. The increase in the provision for income taxes was primarily due to higher pre-tax income. The Company's effective income tax rate was 20.2% for the quarter ended March 31, 2025 and 20.5% for the quarter ended March 31, 2024. The provision for income taxes increased by $403,000, or 13.4%, to $3.42 million for the six months ended March 31, 2025 from $3.02 million for the six months ended March 31, 2024. The increase was primarily due to higher pre-tax income. The Company's effective tax rate was 20.1% for the six months ended March 31, 2025 compared to 20.0% for the six months ended March 31, 2024.

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 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.

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 March 31, 2025, 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 14.14%. 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 March 31, 2025, the Bank had a total of $618.87 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 March 31, 2025, the Bank had no outstanding balance on the BIC line, under which $76.03 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At March 31, 2025, 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.