Timberland Bancorp(TSBK) - 2025 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements of Timberland Bancorp, Inc. and its subsidiary for the periods ended June 30, 2025, and September 30, 2024, including balance sheets, income statements, comprehensive income, shareholders' equity, and cash flows, along with detailed notes on significant accounting policies, investment securities, loans, leases, and other financial disclosures Consolidated Balance Sheets The consolidated balance sheets show a modest increase in total assets, primarily driven by growth in cash and cash equivalents and loans receivable, funded by an increase in deposits, with shareholders' equity also increasing Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | June 30, 2025 | September 30, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :----------------- | :--------- | :--------- | | Total assets | $1,957,192 | $1,923,475 | $33,717 | 1.8% | | Loans receivable, net | $1,441,496 | $1,421,523 | $19,973 | 1.4% | | Total deposits | $1,669,477 | $1,647,668 | $21,809 | 1.3% | | Total shareholders' equity | $256,664 | $245,413 | $11,251 | 4.6% | | Cash and cash equivalents | $193,627 | $164,728 | $28,899 | 17.5% | | Investment securities | $228,045 | $244,354 | $(16,309) | -6.7% | Consolidated Statements of Income The Company reported increased net income for both the three and nine months ended June 30, 2025, primarily driven by higher net interest income, despite increases in provision for credit losses and non-interest expenses Consolidated Statements of Income Highlights (Dollars in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Net income | $7,100 | $5,924 | $1,176 | 19.9% | | Basic EPS | $0.90 | $0.74 | $0.16 | 21.6% | | Diluted EPS | $0.90 | $0.74 | $0.16 | 21.6% | | Net interest income | $17,622 | $15,981 | $1,641 | 10.3% | | Provision for (recapture of) credit losses - net | $440 | $244 | $196 | 80.3% | | Non-interest income, net | $2,875 | $2,791 | $84 | 3.0% | | Non-interest expense, net | $11,167 | $11,069 | $98 | 0.9% | | Metric | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net income | $20,715 | $17,928 | $2,787 | 15.6% | | Basic EPS | $2.61 | $2.22 | $0.39 | 17.6% | | Diluted EPS | $2.60 | $2.21 | $0.39 | 17.6% | | Net interest income | $51,805 | $47,620 | $4,185 | 8.8% | | Provision for (recapture of) credit losses - net | $713 | $660 | $53 | 8.0% | | Non-interest income, net | $8,259 | $8,204 | $55 | 0.7% | | Non-interest expense, net | $33,428 | $32,684 | $744 | 2.3% | Consolidated Statements of Comprehensive Income Total comprehensive income for the three and nine months ended June 30, 2025, was impacted by net income and an other comprehensive loss primarily due to unrealized holding losses on available-for-sale investment securities Consolidated Statements of Comprehensive Income Highlights (Dollars in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :---------------------------------------------------------------------------------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income | $7,100 | $5,924 | $20,715 | $17,928 | | Unrealized holding gain (loss) on investment securities available for sale, net of income taxes | $(105) | $200 | $(795) | $530 | | Total other comprehensive income (loss), net of income taxes | $(105) | $200 | $(795) | $539 | | Total comprehensive income | $6,995 | $6,124 | $19,920 | $18,467 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased due to net income, partially offset by common stock dividends and repurchases, and an accumulated other comprehensive loss Consolidated Statements of Shareholders' Equity Highlights (Dollars in thousands) | Metric | June 30, 2025 | June 30, 2024 | | :-------------------------------- | :------------ | :------------ | | Total shareholders' equity | $256,664 | $241,223 | | Retained earnings | $230,213 | $211,087 | | Accumulated other comprehensive (loss) income | $(775) | $(545) | | Common stock repurchases (9 months) | $(3,846) | $(4,801) | | Dividends paid per common share (9 months) | $0.76 | $0.71 | Consolidated Statements of Cash Flows Net cash provided by operating activities increased, while net cash used in investing activities decreased significantly, and net cash provided by financing activities decreased, leading to a net increase in cash and cash equivalents Consolidated Statements of Cash Flows Highlights (Dollars in thousands) | Metric | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $20,076 | $16,404 | | Net cash used in investing activities | $(3,924) | $(28,676) | | Net cash provided by financing activities | $12,747 | $42,464 | | Net increase in cash and cash equivalents | $28,899 | $30,192 | | Cash and cash equivalents, end of period | $193,627 | $158,913 | Notes to Unaudited Consolidated Financial Statements This section provides detailed disclosures and explanations for the financial statements, covering significant accounting policies, investment securities, loans, goodwill, leases, equity, stock compensation, fair value measurements, recent accounting pronouncements, revenue recognition, commitments, and subsequent events (1) Summary of Significant Accounting Policies This note outlines the basis of presentation for the unaudited consolidated financial statements, confirming adherence to GAAP for interim reporting, principles of consolidation for the Company and its subsidiaries, and the identification of community banking in western Washington as the sole operating segment - Financial statements prepared in accordance with GAAP for interim financial information[26] - Consolidated entities include Timberland Bancorp, Inc., Timberland Bank, and Timberland Service Corp[27] - The Company operates as one reportable operating segment: community banking in western Washington under 'Timberland Bank'[27] (2) Investment Securities The Company's investment portfolio consists of held-to-maturity and available-for-sale securities, with detailed breakdowns of amortized cost, unrealized gains/losses, and fair values, and the allowance for credit losses (ACL) on held-to-maturity securities decreased Investment Securities Summary (Dollars in thousands) | Category | June 30, 2025 Amortized Cost | June 30, 2025 Estimated Fair Value | June 30, 2025 Gross Unrealized Losses | | :-------------------------------- | :----------------------------- | :--------------------------------- | :-------------------------------- | | Held to Maturity | $141,570 | $135,622 | $(6,169) | | Available for Sale | $87,456 | $86,475 | $(1,186) | | Total | $229,026 | $222,097 | $(7,355) | | Metric | June 30, 2025 | September 30, 2024 | | :-------------------------------- | :------------ | :----------------- | | ACL on held-to-maturity securities | $46 | $60 | - Unrealized losses on available-for-sale securities are considered due to fluctuations in market conditions (primarily interest rates) and not credit deterioration; no ACL recorded for AFS securities[35] - The Company recorded a $3.00 million net realized loss on 13 held-to-maturity investment securities for the nine months ended June 30, 2025, all previously recognized as credit losses[31] (3) Goodwill and CDI Goodwill remained unchanged and was determined not to be impaired as of May 31, 2025, following the annual impairment test, while core deposit intangible (CDI) decreased due to scheduled amortization with no impairment indicated - Goodwill remained unchanged at $15.13 million at both June 30, 2025, and September 30, 2024[8][151] - Goodwill was determined not to be impaired as of May 31, 2025, based on the fiscal year 2025 impairment test[44] - CDI decreased by $135,000 (29.9%) to $316,000 at June 30, 2025, from $451,000 at September 30, 2024, due to scheduled amortization[8][151] (4) Loans Receivable and Allowance for Credit Losses Loans receivable, net, increased, primarily in multi-family, one-to-four-family, and commercial real estate loans, while the Allowance for Credit Losses (ACL) on loans increased due to portfolio growth and updated model assumptions, and total delinquent loans increased Loans Receivable and ACL Highlights (Dollars in thousands) | Metric | June 30, 2025 | September 30, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :----------------- | :--------- | :--------- | | Loans receivable, net | $1,441,496 | $1,421,523 | $19,973 | 1.4% | | Allowance for Credit Losses (ACL) | $17,878 | $17,478 | $400 | 2.3% | | Non-accrual loans | $3,843 | $3,885 | $(42) | -1.1% | | Total delinquent loans (30+ days past due) and non-accrual loans | $6,172 | $4,479 | $1,693 | 37.8% | | Substandard loans | $32,371 | $8,435 | $23,936 | 283.8% | - Provision for credit losses on loans for the three months ended June 30, 2025, was $351,000, and for the nine months was $640,000, driven by loan growth and annual model assumption updates[66][67][133] - Substandard loans increased significantly due to downgrading three relationships that were previously classified as watch and special mention[159] (5) Leases The Company holds operating leases for two retail bank branches and an administrative office, with remaining terms of two to seven years, and lease costs remained stable, with a weighted average remaining lease term of 5.5 years and a discount rate of 2.35% at June 30, 2025 Operating Lease Costs (Dollars in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Operating lease cost | $87 | $98 | $284 | $283 | - Weighted average remaining lease term for operating leases was 5.5 years at June 30, 2025[78] - Weighted average discount rate for operating leases was 2.35% at June 30, 2025[78] (6) Net Income Per Common Share Basic and diluted net income per common share increased for both the three and nine months ended June 30, 2025, reflecting higher net income and a decrease in weighted average common shares outstanding Net Income Per Common Share (Dollars in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Basic net income per common share | $0.90 | $0.74 | $2.61 | $2.22 | | Diluted net income per common share | $0.90 | $0.74 | $2.60 | $2.21 | | Weighted average common shares outstanding (Basic) | 7,893,308 | 8,004,552 | 7,929,626 | 8,067,068 | (7) Accumulated Other Comprehensive Income (Loss) The Company reported an accumulated other comprehensive loss of $(775) thousand at June 30, 2025, primarily due to unrealized holding losses on available-for-sale securities, net of income taxes Accumulated Other Comprehensive Income (Loss) (Dollars in thousands) | Metric | June 30, 2025 | March 31, 2025 | | :-------------------------------- | :------------ | :------------- | | Balance of AOCI at end of period | $(775) | $(670) | | Metric | Nine Months Ended June 30, 2025 | | :-------------------------------- | :------------------------------ | | Other comprehensive loss (net of income taxes) | $(795) | (8) Stock Compensation Plans The Company operates under the 2019 Equity Incentive Plan, with 162,185 shares available for future issuance, and stock option activity for the nine months ended June 30, 2025, included 41,960 exercised options and 11,300 forfeited options, with unrecognized compensation costs totaling $309,000 for stock options and $1.12 million for restricted stock - 162,185 shares of common stock remained available for issuance under the 2019 Equity Incentive Plan at June 30, 2025[85] Stock Option Activity (Nine Months Ended June 30, 2025) | Metric | Number of Shares | Weighted Average Exercise Price | | :-------------------------------- | :--------------- | :------------------------------ | | Options outstanding, beginning of period | 306,240 | $25.21 | | Exercised | (41,960) | $19.47 | | Forfeited | (11,300) | $28.41 | | Options outstanding, end of period | 252,980 | $26.02 | - Unrecognized compensation cost related to unvested stock options was $309,000, expected to be recognized over a weighted average period of 1.37 years[93] - Unrecognized compensation cost related to unvested restricted stock awards was $1.12 million, expected to be recognized over a weighted average period of 2.28 years[95] (9) Fair Value Measurements The Company measures certain assets at fair value on a recurring basis, primarily investment securities available for sale and equity securities, categorized into Level 1 and Level 2 inputs, while non-recurring fair value measurements are applied to collateral-dependent loans and OREO, classified as Level 3 due to significant unobservable inputs Assets Measured at Fair Value on a Recurring Basis (June 30, 2025, Dollars in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :------ | | Available for sale investment securities | $14,866 | $71,609 | $— | $86,475 | | Investments in equity securities | $855 | $— | $— | $855 | | Total | $15,721 | $71,609 | $— | $87,330 | Assets Measured at Fair Value on a Non-Recurring Basis (June 30, 2025, Dollars in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :------ | | Individually evaluated collateral-dependent loans | $— | $— | $523 | $523 | | OREO and other repossessed assets | $— | $— | $221 | $221 | | Total | $— | $— | $744 | $744 | - Collateral-dependent loans and OREO are classified within Level 3 of the fair value hierarchy due to significant unobservable inputs[103][104] (10) Recent Accounting Pronouncements The FASB issued ASU 2023-09 (Income Tax Disclosures) and ASU 2024-03/2025-01 (Expense Disaggregation Disclosures), which the Company expects to impact only disclosure requirements, with no material effect on its financial position, results of operations, or cash flows - ASU 2023-09 (Income Taxes) requires improved income tax disclosures, effective for annual periods beginning after December 15, 2024[109] - ASU 2024-03 (Income Statement-Expense Disaggregation Disclosures) requires specified information about certain costs and expenses, effective for annual periods beginning after December 15, 2026[110][111] - The Company expects these ASUs to impact only disclosure requirements and not materially affect its financial position, results of operations, or cash flows[109][110][112] (11) Revenue from Contracts with Customers The majority of the Company's revenue is outside the scope of ASC 606, with revenue recognized under ASC 606, included in non-interest income, comprising service charges on deposits, ATM and debit card interchange fees, escrow fees, and non-deposit investment sales - The majority of the Company's revenues, such as interest income and gains on loan sales, are not within the scope of ASC 606[113] - Revenue recognized under ASC 606 includes service charges on deposits, ATM and debit card interchange transaction fees, escrow fees, and fee income from non-deposit investment sales[113] ASC 606 Revenue (Dollars in thousands) | Revenue Type | Three Months Ended June 30, 2025 | Nine Months Ended June 30, 2025 | | :-------------------------------- | :------------------------------- | :------------------------------ | | Service charges on deposits | $966 | $2,924 | | ATM and debit card interchange transaction fees | $1,262 | $3,706 | | Escrow fees | $32 | $66 | | Fee income from non-deposit investment sales (included in 'Other') | $9 | $12 | | Total ASC 606 Revenue | $2,269 | $6,708 | (12) Commitments and Contingencies The Company has off-balance-sheet commitments, primarily undisbursed construction loans, lines of credit, and commitments to extend credit, totaling $237.13 million at June 30, 2025, with an Allowance for Credit Losses (ACL) for unfunded commitments increasing to $413,000 Summary of Commitments (Dollars in thousands) | Commitment Type | June 30, 2025 | June 30, 2024 | | :-------------------------------- | :------------ | :------------ | | Undisbursed portion of construction loans in process | $76,272 | $87,196 | | Undisbursed lines of credit | $125,623 | $118,050 | | Commitments to extend credit | $35,233 | $14,278 | | Total Commitments | $237,128 | $219,524 | | Metric | June 30, 2025 | June 30, 2024 | | :-------------------------------- | :------------ | :------------ | | ACL on unfunded loan commitments | $413 | $267 | - The Company has an employee severance compensation plan and employment agreements with key officers, providing severance benefits in the event of a change in control[119][120] - Management believes liabilities arising from various pending and threatened legal actions in the ordinary course of business will not have a material effect on the future consolidated financial position[121] (13) Subsequent Events The Company anticipates recording approximately $1.00 million in death benefit claim income during the quarter ending September 30, 2025, following the passing of a former officer on whom BOLI policies were held - The Company anticipates recording approximately $1.00 million in death benefit claim income during the September 30, 2025, quarter[122] - This income relates to BOLI policies on a former officer[122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and operating results, highlighting key trends, significant changes in balance sheet items, income statement performance, asset quality, liquidity, and capital resources for the three and nine months ended June 30, 2025, compared to prior periods Special Note Regarding Forward-Looking Statements This section serves as a cautionary note, identifying various known and unknown risks and uncertainties that could cause actual results to differ materially from forward-looking statements, including economic conditions, interest rate changes, credit risks, regulatory actions, and technological advancements like AI - Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially[125] - Key risks include adverse impacts to economic conditions, changes in interest rate levels, credit risks of lending activities, legislation or regulatory changes, and vulnerabilities in information systems or third-party service providers[125][128] - The Company does not undertake to publicly update or revise any forward-looking statements[126] Overview Timberland Bancorp, Inc. is the holding company for Timberland Bank, a community-oriented bank serving western Washington with 23 offices, whose profitability is primarily driven by net interest income, influenced by market interest rates and the volume/mix of assets and liabilities - Timberland Bancorp, Inc. is the holding company for Timberland Bank, a community-oriented bank operating 23 offices in western Washington[127] - As of June 30, 2025, the Company had total assets of $1.96 billion, net loans receivable of $1.44 billion, total deposits of $1.67 billion, and total shareholders' equity of $256.66 million[127] - Profitability primarily depends on net interest income after provision for (recapture of) credit losses, which is influenced by market interest rates and the volume/mix of interest-earning assets and liabilities[131][132] - The Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate three times during 2024, resulting in a range of 4.25% to 4.50% at June 30, 2025[132] Critical Accounting Estimates This section refers to the Company's 2024 Form 10-K for a detailed description of critical accounting estimates, noting that there have been no material changes in these policies or estimates - There have been no material changes in the Company's critical accounting policies and estimates as previously disclosed in the 2024 Form 10-K[137] Comparison of Financial Condition at June 30, 2025 and September 30, 2024 The Company experienced overall asset growth, primarily in cash and loans, funded by increased deposits, while shareholders' equity also rose, and investment securities decreased due to maturities and prepayments Financial Condition Changes (Dollars in thousands) | Metric | June 30, 2025 | September 30, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :----------------- | :--------- | :--------- | | Total assets | $1,957,192 | $1,923,475 | $33,717 | 1.8% | | Net loans receivable | $1,441,496 | $1,421,523 | $19,973 | 1.4% | | Total deposits | $1,669,477 | $1,647,668 | $21,809 | 1.3% | | Shareholders' equity | $256,664 | $245,413 | $11,251 | 4.6% | | Cash and cash equivalents & CDs held for investment | $202,089 | $174,937 | $27,152 | 15.5% | | Investment securities (incl. equity) | $228,900 | $245,220 | $(16,320) | -6.7% | | Loan originations (9 months) | $210,810 | $202,620 | $8,190 | 4.0% | | Loan servicing rights, net | $911 | $1,372 | $(461) | -33.6% | - The increase in assets was primarily funded by an increase in deposits[138] - The deposit mix shifted toward higher-cost funding sources, such as certificates of deposits, reflecting competitive pricing pressures[154] Asset Quality and Commercial Real Estate Portfolio Breakdown Non-performing assets slightly increased, primarily due to OREO, while non-accrual loans decreased, and substandard loans significantly increased due to downgrades of existing relationships, with the commercial real estate (CRE) portfolio remaining diversified Asset Quality Metrics (Dollars in thousands) | Metric | June 30, 2025 | September 30, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :----------------- | :--------- | :--------- | | Non-performing assets | $4,102 | $3,936 | $166 | 4.2% | | Non-performing assets as % of total assets | 0.21% | 0.20% | 0.01% | 5.0% | | Non-accrual loans | $3,843 | $3,885 | $(42) | -1.1% | | Substandard loans | $32,371 | $8,435 | $23,936 | 283.8% | | OREO and other repossessed assets, net | $221 | $— | $221 | N/A | - The increase in substandard loans was primarily a result of downgrading three relationships that were previously classified as watch and special mention[159] Commercial Real Estate (CRE) Loan Portfolio Breakdown by Collateral (June 30, 2025, Dollars in thousands) | Collateral Type | Balance | Percent of CRE Portfolio | | :-------------------------------- | :------ | :----------------------- | | Industrial warehouse | $128,822 | 21.2% | | Medical/dental offices | $81,238 | 13.4% | | Office buildings | $68,916 | 11.3% | | Other retail buildings | $54,472 | 9.0% | | Mini-storage | $38,483 | 6.3% | | Hotel/motel | $31,656 | 5.2% | | Restaurants | $27,485 | 4.5% | | Gas stations/convenience stores | $24,359 | 4.0% | | Churches | $14,690 | 2.4% | | Nursing homes | $13,532 | 2.2% | | Shopping centers | $10,507 | 1.7% | | Mobile home parks | $8,882 | 1.5% | | Other | $104,882 | 17.3% | | Total CRE | $607,924 | 100.0% | Comparison of Operating Results for the Three and Nine Months Ended June 30, 2025 and 2024 Net income and diluted EPS increased for both the quarter and nine months, driven by higher net interest income, with net interest margin expanding, while non-interest income saw a modest increase and non-interest expense rose due to taxes and professional fees Operating Results Highlights (Dollars in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net income | $7,100 | $5,924 | $20,715 | $17,928 | | Diluted EPS | $0.90 | $0.74 | $2.60 | $2.21 | | Net interest income | $17,622 | $15,981 | $51,805 | $47,620 | | Net interest margin (NIM) | 3.80% | 3.53% | 3.74% | 3.53% | | Total non-interest income | $2,875 | $2,791 | $8,259 | $8,204 | | Total non-interest expense | $11,167 | $11,069 | $33,428 | $32,684 | | Efficiency ratio | 54.48% | 58.97% | 55.65% | 58.55% | | Provision for income taxes | $1,790 | $1,535 | $5,208 | $4,552 | - The increase in net interest income was due to a higher weighted average yield on interest-earning assets and an increase in average total interest-earning assets[168][173] - Non-interest expense increases were mainly due to higher state and local taxes and professional fees[195][196] Average Balances, Interest and Average Yields/Cost The Company experienced an increase in average interest-earning assets and their weighted average yield for both the three and nine months ended June 30, 2025, while interest-bearing liabilities also grew, their average cost decreased for the quarter but slightly increased for the nine months, contributing to an expanded net interest margin Average Yields and Costs (Three Months Ended June 30) | Metric | 2025 | 2024 | Change (bps) | | :-------------------------------- | :--- | :--- | :----------- | | Weighted average yield on interest-earning assets | 5.50% | 5.33% | 17 | | Average cost of interest-bearing liabilities | 2.49% | 2.64% | -15 | | Net interest margin | 3.80% | 3.53% | 27 | Average Yields and Costs (Nine Months Ended June 30) | Metric | 2025 | 2024 | Change (bps) | | :-------------------------------- | :--- | :--- | :----------- | | Weighted average yield on interest-earning assets | 5.46% | 5.17% | 29 | | Average cost of interest-bearing liabilities | 2.53% | 2.46% | 7 | | Net interest margin | 3.74% | 3.53% | 21 | - The average balance of loans receivable increased by $58.77 million (4.2%) for the three months and $78.29 million (5.7%) for the nine months ended June 30, 2025[170][175] Rate Volume Analysis The analysis shows that for both the three and nine months ended June 30, 2025, the increase in net interest income was primarily driven by changes in interest rates, particularly on loans receivable, with volume changes also contributing positively Net Interest Income Change by Rate and Volume (Dollars in thousands) | Period | Net Change | Increase (Decrease) due to Rate | Increase (Decrease) due to Volume | | :-------------------------------- | :--------- | :------------------------------ | :------------------------------ | | Three months ended June 30, 2025 vs. 2024 | $1,641 | $1,304 | $337 | | Nine months ended June 30, 2025 vs. 2024 | $4,185 | $2,463 | $1,722 | - For the three months, the increase in income on interest-earning assets was $1.405 million, with $674,000 from rate and $731,000 from volume[187] - For the nine months, the increase in income on interest-earning assets was $5.876 million, with $3.013 million from rate and $2.863 million from volume[187] Liquidity The Company maintains adequate liquidity through customer deposits, loan payments, and available credit facilities with FHLB, FRB, and PCBB, with liquid assets increasing, and the Bank projecting future capital expenditures and lease commitments - Primary sources of funds include customer deposits, loan payments, loan sales, maturing investment securities, and borrowings from FHLB and FRB[199] Liquidity Resources (Dollars in thousands) | Metric | June 30, 2025 | | :-------------------------------- | :------------ | | Regulatory liquidity ratio | 14.02% | | Available FHLB borrowings | $624,060 | | Outstanding FHLB borrowings | $20,000 | | Available FRB borrowing line | $70,190 | | Liquid assets (cash, CDs, AFS securities) | $289,420 | | Timberland Bancorp (unconsolidated) liquid assets | $1,240 | - The Bank projects approximately $650,000 in pre-tax capital expenditures for the remainder of fiscal 2025, related to remodeling a leased building for a new branch[206] Capital Resources The Bank maintains a 'well-capitalized' status under FDIC regulations, exceeding all minimum regulatory capital requirements, and Timberland Bancorp also exceeds regulatory capital ratios for bank holding companies, continuing its quarterly cash dividend practice and adopting a new stock repurchase program - The Bank was considered 'well-capitalized' under applicable regulatory requirements at June 30, 2025[212] Bank Regulatory Capital Ratios (June 30, 2025, Dollars in thousands) | Capital Ratio | Actual Amount | Actual Ratio | Minimum To Be 'Adequately Capitalized' Ratio | To Be 'Well Capitalized' Ratio | | :-------------------------------- | :------------ | :----------- | :------------------------------------------- | :----------------------------- | | Leverage Capital Ratio (Tier 1) | $241,598 | 12.56% | 4.00% | 5.00% | | Common Equity Tier 1 Capital | $241,598 | 19.16% | 4.50% | 6.50% | | Tier 1 Capital | $241,598 | 19.16% | 6.00% | 8.00% | | Total Capital | $257,392 | 20.41% | 8.00% | 10.00% | - Timberland Bancorp (holding company) would have exceeded all regulatory capital requirements if subject to guidelines for banks with $3.0 billion or more in assets[215] - The Company expects to continue its practice of paying quarterly cash dividends on its common stock at a rate of $0.26 per share[209] - A new stock repurchase program was adopted on July 22, 2025, authorizing the repurchase of up to 393,842 shares (approximately 5% of outstanding common stock)[210] Key Financial Ratios and Data Performance ratios for the three and nine months ended June 30, 2025, show improvements in return on average assets, return on average equity, net interest margin, and efficiency ratio compared to the prior year Performance Ratios | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Return on average assets | 1.47% | 1.25% | 1.44% | 1.27% | | Return on average equity | 11.23% | 9.95% | 11.07% | 10.10% | | Net interest margin | 3.80% | 3.53% | 3.74% | 3.53% | | Efficiency ratio | 54.48% | 58.97% | 55.65% | 58.55% | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the Company's market risk disclosures from those provided in its 2024 Form 10-K - No material changes in market risk information from the Company's 2024 Form 10-K[217] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures, concluding their effectiveness as of June 30, 2025, and notes no material changes in internal control over financial reporting during the quarter, while acknowledging the inherent limitations of all control procedures - The Company's disclosure controls and procedures were effective as of June 30, 2025, ensuring timely and accurate information disclosure[223] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[223] - Acknowledges inherent limitations of control procedures, stating they provide reasonable, not absolute, assurance against errors and fraud[219] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company and the Bank are not currently party to any material legal proceedings, though they may be involved in various claims and legal actions in the ordinary course of business - Neither the Company nor the Bank is a party to any material legal proceedings at this time[220] Item 1A. Risk Factors This section updates the Company's risk factors, specifically introducing new risks associated with the current and future uses of Artificial Intelligence (AI) and other emerging technologies, including model risk, cybersecurity threats, operational risks, and ethical/reputational concerns - New risk factor identified: Current and future uses of Artificial Intelligence (AI) and other emerging technologies[221] - AI introduces model risk (flawed algorithms, biased data), cybersecurity threats (data breaches, adversarial attacks, data poisoning), and regulatory compliance concerns due to 'black-box' systems[221] - Operational risks from AI include potential system failures, over-reliance on AI, and integration challenges, while ethical and reputational risks may erode customer trust[222] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 34,236 shares of common stock during the quarter ended June 30, 2025, at an average price of $30.76, and a new stock repurchase program was adopted on July 22, 2025, authorizing the repurchase of up to 393,842 shares, replacing the prior program Shares Repurchased During Q3 2025 | Period | Total No. of Shares Repurchased | Average Price Paid Per Share | Maximum No. of Shares that May Yet Be Purchased Under the Plan (1) | | :--- | :--- | :--- | :--- | | 4/01/2025 - 4/30/2025 | 4,015 | $30.03 | 61,983 | | 5/01/2025 - 5/31/2025 | 19,377 | $31.15 | 42,606 | | 6/01/2025 - 6/30/2025 | 10,844 | $30.34 | 31,762 | | Total | 34,236 | $30.76 | 31,762 | - A new stock repurchase program was adopted on July 22, 2025, authorizing the repurchase of up to 393,842 shares (approximately 5% of the Company's outstanding common stock), replacing the prior program[210][225] - The Company is subject to Federal Reserve restrictions requiring prior written notice for repurchases exceeding 10% of consolidated net worth over 12 months[226] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reported period - Not applicable[227] Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reported period - Not applicable[227] Item 5. Other Information This section primarily refers to stock repurchases, noting no director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the quarter - No director or officer (as defined in Rule 16a-1(f) under the Act) of the Company adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the quarter ended June 30, 2025[232] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including articles of incorporation, bylaws, employment agreements, equity incentive plans, certifications, and XBRL formatted financial statements - Includes Articles of Incorporation, Amended and Restated Bylaws, various Employment Agreements, Equity Incentive Plans (2019 Plan), and Certifications (302 and 906 of Sarbanes Oxley Act)[232] - Financial statements and notes are provided in Extensible Business Reporting Language (XBRL) format as Exhibit 101 and Cover Page Interactive Data File as Exhibit 104[232] SIGNATURES The report is duly signed on behalf of Timberland Bancorp, Inc. by its Chief Executive Officer, Dean J. Brydon, and Chief Financial Officer, Marci A. Basich, on August 8, 2025 - The report was signed by Dean J. Brydon, Chief Executive Officer, and Marci A. Basich, Chief Financial Officer, on August 8, 2025[236]