Overview

Timberland Bancorp, Inc. is the holding company for Timberland Bank, which serves consumers and businesses across several counties in Washington state. As of March 31, 2025, the company had $1.93 billion in total assets, $1.42 billion in net loans, $1.65 billion in total deposits, and $252.52 million in total shareholders’ equity.

The company’s profitability depends primarily on its net interest income after provision for credit losses. Net interest income is the difference between the interest earned on loans and investments, and the interest paid on deposits and borrowings. The company’s net interest income, net interest margin, and net interest spread are influenced by changes in market interest rates, the shape of the yield curve, and the interest rates earned and paid.

The provision for credit losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio. Improvements in loan risk ratings, property values, or recoveries of charged-off amounts may offset increases in the allowance for credit losses due to loan growth or increased expected credit losses.

Net income is also impacted by non-interest income, such as service charges, loan sales, and BOLI earnings, as well as non-interest expense, including salaries, premises costs, and technology expenses. The company’s results of operations may be affected by economic conditions, market interest rates, government policies, and regulatory actions.

Financial Condition Comparison

Total assets increased by 0.5% to $1.93 billion at March 31, 2025, primarily due to increases in cash and cash equivalents and other assets, which were partially offset by decreases in investment securities and several other asset categories.

Net loans receivable decreased by 0.1% to $1.42 billion, mainly due to decreases in construction and commercial business loans, partially offset by an increase in one- to four-family loans. Total deposits increased by 0.2% to $1.65 billion, primarily due to increases in certificates of deposit and savings accounts, partially offset by decreases in money market, non-interest-bearing, and NOW checking accounts.

Shareholders’ equity increased by 2.9% to $252.52 million, primarily due to net income and stock option exercises, partially offset by dividend payments, stock repurchases, and an other comprehensive loss.

Asset Quality and Commercial Real Estate Portfolio

Non-performing assets to total assets decreased from 0.20% at September 30, 2024 to 0.13% at March 31, 2025, as non-accrual loans decreased by 34.2%. The decrease was primarily due to loan payoffs in the commercial real estate and commercial business portfolios.

The company’s commercial real estate loan portfolio is diversified across various collateral types, with the largest concentrations in industrial warehouses, medical/dental offices, and office buildings. The non-accrual loans in the commercial real estate portfolio decreased from $1.16 million at September 30, 2024 to $324,000 at March 31, 2025.

Results of Operations Comparison

Net income increased by 18.3% to $6.76 million for the quarter ended March 31, 2025, and by 13.4% to $13.62 million for the six months ended March 31, 2025. The increases were primarily due to a $1.58 million increase in net interest income for the quarter and a $2.54 million increase for the six months.

The net interest margin increased from 3.48% to 3.79% for the quarter and from 3.53% to 3.71% for the six months, primarily due to a 32 basis point increase in the weighted average yield of interest-earning assets, partially offset by a 3 basis point decrease in the average rate paid on interest-bearing liabilities.

The provision for credit losses increased from $81,000 to $246,000 for the quarter and from $417,000 to $272,000 for the six months, primarily due to changes in the loan portfolio composition and an increase in loans receivable.

Non-interest income increased by 2.8% for the quarter, mainly due to higher gain on sale of loans and an increase in the fair value of equity securities, partially offset by decreases in service charges and ATM/debit card fees. Non-interest income decreased by 0.5% for the six months, primarily due to lower service charges and ATM/debit card fees, partially offset by higher gain on sale of loans and BOLI earnings.

Non-interest expense increased by 1.8% for the quarter and 3.0% for the six months, primarily due to higher professional fees, technology and communications expenses, and salary and employee benefits, partially offset by lower ATM/debit card interchange expense.

The efficiency ratio improved from 60.22% to 56.25% for the quarter and from 58.34% to 56.26% for the six months, reflecting higher overall revenue partially offset by higher non-interest expense.

Liquidity and Capital Resources

The company’s primary sources of funds are customer deposits, loan repayments, loan sales, maturing investments, and FHLB borrowings. The company maintains sufficient cash and short-term investments to meet short-term liquidity needs, with a regulatory liquidity ratio of 14.14% at March 31, 2025.

The company has available borrowing capacity with the FHLB, the Federal Reserve, and a short-term borrowing line, which it expects to utilize as needed to fund loan originations, deposit withdrawals, and investment opportunities.

The Bank is considered “well-capitalized” under regulatory capital requirements, with a Tier 1 capital ratio of 18.99% and a total capital ratio of 20.24% at March 31, 2025. Timberland Bancorp, Inc. also exceeds all regulatory capital requirements.

The company currently expects to continue its practice of paying quarterly cash dividends on common stock, subject to the Board’s discretion. The company also has an active stock repurchase program, with 65,998 shares remaining available for future purchases as of March 31, 2025.

Outlook and Risks

The company’s financial performance and outlook may be affected by various factors, including:

• Economic conditions in its local and other markets
• Changes in interest rates and the shape of the yield curve
• Inflation and the Federal Reserve’s monetary policy
• Credit risks and changes in the allowance for credit losses
• Regulatory actions and changes in banking laws and regulations
• Ability to attract and retain deposits
• Operational and cybersecurity risks related to emerging technologies like AI
• Ability to control operating costs and expenses

The company cautions that forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated. Investors should carefully consider these risk factors when evaluating the company’s financial condition and prospects.

Overall, Timberland Bancorp has demonstrated solid financial performance, with increases in net income, net interest margin, and capital levels. The company’s diversified loan portfolio, strong liquidity, and well-capitalized position provide a foundation for continued growth and shareholder value creation, though it remains vigilant to potential risks and economic uncertainties.