TIMBERLAND BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used in this Form 10-Q, the terms “we,” “us,” “our” and the “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. References to the “Bank” in this Form 10-Q, refer to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank’s wholly-owned subsidiary, Timberland Service Corporation. 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. Special Note Regarding Forward-Looking Statements 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: • adverse impacts to economic conditions in our local markets or other markets where we have lending relationships • effects of employment levels, labor shortages inflation, a recession or slowed economic growth; • 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; • the impact of inflation and the Federal Reserve monetary policy; • the effects of any Federal government shutdown; • credit risks of lending activities, including loan delinquencies, write-offs, changes in our ACL, and provision for credit losses; • fluctuations in the demand for loans, the number of unsold homes, land and other properties, and real estate values in our market areas; • secondary market conditions for loans and our ability to sell loans in the secondary market; 37 • 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; • the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; • legislative or regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; • our ability to attract and retain deposits; • our ability to control operating costs and expenses; • use of estimates in determining the fair value of assets, which may prove incorrect; • disruptions or security breaches or other adverse events, failures or interruptions in or attacks on our information technology systems or on the third-party vendors; • our ability to retain key members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to implement our business strategies, including expectations regarding key growth initiatives and strategic priorities; • increased competitive pressures among financial services companies, including repricing and competitors' pricing initiatives, and their impact on our market position, loan and deposit products; • changes in consumer spending, borrowing and savings habits; • the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; • our ability to pay dividends on our common stock; • quality and composition of our securities portfolio and the impact of adverse changes in the securities markets; • inability of key third-party providers to perform their obligations; • changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board (“FASB”); • The potential imposition of new tariffs or changes to existing trade policies that could affect economic activity or specific industry sectors; • environmental, social and governance goals and targets; • effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest, and other external events; • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and • other risks described elsewhere in this Form 10-Q and our other reports filed with or furnished to the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 (the "2024 Form 10-K”). 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. Overview 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. 38 The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans. The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) credit losses. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities. 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. 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. 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. Results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities. Critical Accounting Estimates Management's discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions. 39 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. Comparison of Financial Condition at December 31, 2024 and September 30, 2024 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. 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. 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. 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. A more detailed explanation of the changes in significant balance sheet categories follows: 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. 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.” FHLB Stock : FHLB stock remained constant at $2.04 million at December 31, 2024 and September 30, 2024. Other Investments: Other investments, consisting solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, was unchanged at $3.00 million at both December 31, 2024 and September 30, 2024. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements. 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. 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- 40 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. For additional information on loans, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.” 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. 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. 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. 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.” 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. 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. Deposits consisted of the following at December 31, 2024 and September 30, 2024 (dollars in thousands): December 31, 2024 September 30, 2024 Amount Percent Amount Percent Non-interest-bearing demand $ 402,911 24.7 % $ 413,116 25.1 % NOW checking 323,412 19.8 333,329 20.2 Savings 206,845 12.7 205,993 12.5 Money market 311,413 19.1 326,922 19.8 Certificates of deposit under $250 212,764 13.1 205,970 12.4 Certificates of deposit $250 and over 122,997 7.5 113,579 6.9 Certificates of deposit - brokered 50,074 3.1 48,759 3.1 Total $ 1,630,416 100.0 % $ 1,647,668 100.0 % 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%. 41 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. Asset Quality and Commercial Real Estate Portfolio Breakdown: 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. The following table sets forth information with respect to the Company’s non-performing assets at December 31, 2024 and September 30, 2024 (dollars in thousands): December 31, 2024 September 30, 2024 Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family (1) $ 47 $ 49 Commercial 698 1,158 Consumer loans: Home equity and second mortgage 587 618 Commercial business loans 1,401 2,060 Total loans accounted for on a non-accrual basis 2,733 3,885 Accruing loans which are contractually past due 90 days or more — — Total of non-accrual and 90 days or more past due loans 2,733 3,885 Non-accrual investment securities 45 51 OREO and other repossessed assets, net 221 — Total non-performing assets $ 2,999 $ 3,936 Non-accrual and 90 days or more past due loans as a percentage of loans receivable 0.19 % 0.27 % Non-accrual and 90 days or more past due loans as a percentage of total assets 0.14 % 0.20 % Non-performing assets as a percentage of total assets 0.16 % 0.20 % Loans receivable (2) $ 1,429,107 $ 1,439,001 Total assets $ 1,909,480 $ 1,923,475 ___________________________________ (1) At December 31, 2024 and September 30, 2024, there were no one-to four-family properties in the process of foreclosure. (2) Does not include loans held for sale. Loan balances are before any reduction of the ACL. 42 The following tables provide a breakdown of commercial real estate ("CRE") loans by collateral types as of December 31, 2024 and September 30, 2024: CRE Loan Portfolio Breakdown by Collateral at December 31, 2024 ($ in thousands) Collateral Type Balance Percent of CRE Portfolio Percent of Total Loan Portfolio Average Balance per Loan Non-Accrual Industrial warehouse $ 126,435 21 % 8 % $ 1,228 $ 195 Medical/dental offices 84,786 14 6 1,265 — Office buildings 67,600 11 4 768 — Other retail buildings 52,313 9 3 545 — Mini-storage 33,773 6 2 1,351 — Hotel/motel 32,367 5 2 2,697 — Restaurants 27,977 5 2 560 273 Gas stations/convenience stores 24,881 4 2 1,037 — Churches 15,874 3 1 934 — Nursing homes 13,745 2 1 1,964 — Mobile home parks 10,694 2 1 465 — Shopping centers 10,648 2 1 1,774 — Other 95,961 16 6 706 230 Total CRE $ 597,054 100 % 39 % $ 913 $ 698 CRE Loan Portfolio Breakdown by Collateral at September 30, 2024 ($ in thousands) Collateral Type Balance Percent of CRE Portfolio Percent of Total Loan Portfolio Average Balance per Loan Non-Accrual Industrial warehouse $ 125,852 21 % 8 % $ 1,246 $ 195 Medical/dental offices 83,276 14 5 1,262 — Office buildings 68,526 11 5 779 — Other retail buildings 50,067 8 3 533 — Mini-storage 38,600 6 3 1,430 — Hotel/motel 31,182 5 2 2,835 — Restaurants 27,269 5 2 557 273 Gas stations/convenience stores 25,145 4 2 1,048 — Nursing homes 18,434 3 1 2,304 — Churches 16,235 3 1 854 — Mobile home parks 10,798 2 1 491 — Shopping centers 10,718 2 1 1,786 — Other 93,117 16 6 705 690 Total CRE $ 599,219 100 % 40 % $ 926 $ 1,158 43 Comparison of Operating Results for the Three Months Ended December 31, 2024 and 2023 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. 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. 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. 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. 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. 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. 44 Average Balances, Interest and Average Yields/Cost The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands). Three Months Ended December 31, 2024 2023 Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost Interest-earning assets: Loans receivable (1)(2) $ 1,438,144 $ 21,032 5.80 % $ 1,332,971 $ 18,395 5.52 % Investment securities (2) 241,345 2,138 3.51 310,183 2,311 2.96 Dividends from mutual funds, FHLB stock and other investments 5,891 86 6.41 6,981 91 5.19 Interest-bearing deposits in banks and CDs 166,764 2,001 4.76 126,253 1,699 5.35 Total interest-earning assets 1,852,144 25,257 5.42 1,776,388 22,496 5.07 Non-interest-earning assets 75,534 81,612 Total assets $ 1,927,678 $ 1,858,000 Interest-bearing liabilities: Savings $ 205,650 144 0.28 $ 220,042 121 0.22 Money market 324,424 2,797 3.42 224,939 1,329 2.34 NOW checking 328,455 1,142 1.38 376,682 1,435 1.51 Certificates of deposit 331,785 3,418 4.10 268,628 2,681 3.97 Brokered CDs 46,414 583 4.98 42,725 578 5.38 Short-term borrowings — — — 13,804 195 5.62 Long-term borrowings 20,000 203 4.03 15,000 153 4.06 Total interest-bearing liabilities 1,256,728 8,287 2.62 1,161,820 6,492 2.22 Non-interest-bearing deposits 414,149 450,027 Other liabilities 10,146 11,878 Total liabilities 1,681,023 1,623,725 Shareholders' equity 246,655 234,275 Total liabilities and shareholders' equity $ 1,927,678 $ 1,858,000 Net interest income $ 16,970 $ 16,004 Interest rate spread 2.81 % 2.85 % Net interest margin (3) 3.64 % 3.60 % Ratio of average interest-earning assets to average interest- bearing liabilities 147.38 % 152.90 % _______________ (1) Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends. (2) Average balances include loans and investment securities on non-accrual status. (3) Net interest income divided by total average interest-earning assets, annualized. 45 Rate Volume Analysis The following table sets forth the effects of changing rates and volumes on the net interest income of the Company. Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns). Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands). Three months ended December 31, 2024 compared to three months ended December 31, 2023 increase (decrease) due to Rate Volume Net Change Interest-earning assets: Loans receivable and loans held for sale $ 1,136 $ 1,501 $ 2,637 Investment securities 392 (565) (173) Dividends from mutual funds, FHLB stock and other investments 10 (15) (5) Interest-bearing deposits in banks and CDs (199) 501 302 Total net increase in income on interest-earning assets 1,339 1,422 2,761 Interest-bearing liabilities: Savings 31 (8) 23 Money market 747 720 1,467 NOW checking (118) (174) (292) Certificates of deposit 37 706 743 Short-term FHLB borrowings (98) (98) (196) Long-term borrowings (1) 51 50 Total net increase in expense on interest-bearing liabilities 598 1,197 1,795 Net increase in net interest income $ 741 $ 225 $ 966 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. 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. While management believes the estimates and assumptions used in its determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions will not have a material adverse impact on our financial condition and results of operations. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth, among other factors, could 46 result in a material increase in the ACL and have a material adverse impact on the financial condition and results of operations. In addition, the determination of the amount of the ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination and have a material adverse impact on the financial condition and results of operations. 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. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.” 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. 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. 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. Liquidity The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and borrowings, if needed, from the FHLB and FRB. While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. 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. Liquidity management is both a short and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected 47 deposit flows, and (iv) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits, CDs held for investment and short-term government and agency obligations. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, the FRB and PCBB. 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. 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. 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. Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets. Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. 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. The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months. 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. 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). 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, 48 liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares. Capital Resources The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at December 31, 2024, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status. The following table compares the Bank’s actual capital amounts at December 31, 2024, to its minimum regulatory capital requirements at that date (dollars in thousands): Actual Regulatory Minimum To Be “Adequately Capitalized” To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Leverage Capital Ratio: Tier 1 capital $233,573 12.23 % $76,404 4.00 % $95,505 5.00 % Risk-based Capital Ratios: Common equity Tier 1 capital 233,573 18.00 56,722 4.50 81,932 6.50 Tier 1 capital 233,573 18.00 75,630 6.00 100,840 8.00 Total capital 249,353 19.25 100,840 8.00 126,050 10.00 In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At December 31, 2024, the Bank's CET1 capital exceeded the required capital conservation buffer. Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets (as of June 30th of the preceding year), the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2024, Timberland Bancorp, Inc. would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of December 31, 2024 (dollars in thousands): Actual Amount Ratio Leverage Capital Ratio: Tier 1 capital $235,783 12.32 % Risk-based Capital Ratios: Common equity Tier 1 capital 235,783 18.69 Tier 1 capital 235,783 18.69 Total capital 251,572 19.55 49 Key Financial Ratios and Data Three Months Ended December 31, 2024 2023 PERFORMANCE RATIOS : Return on average assets 1.41 % 1.36 % Return on average equity 11.03 % 10.75 % Net interest margin 3.64 % 3.60 % Efficiency ratio 56.27 % 56.50 % Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in information concerning market risk from the information provided in the Company’s 2024 Form 10-K.