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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.38pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Real-time Form 4 intelligence. Smarter insider tracking.
Net-tone change vs last year's 10-K.
MD&A
+0.03pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
impair+11
disruptions+7
negatively+4
harm+4
scrutiny+3
Positive rising
opportunities+1
benefit+1
satisfy+1
innovation+1
enhance+1
Risk Factors (Item 1A)
8,704 words
Item 1A. Risk Factors
We assume and manage a certain degree of risk in order to conduct our business. In addition to the risk factors described below, other risks and uncertainties not specifically mentioned, or that are currently known to, or deemed to be immaterial by management, also may materially and adversely affect our financial position, results of operations and/or cash flows. Before making an investment decision, you should carefully consider the risks described below together with all the other information included in this Form 10-K and our other filings with the SEC. If any of the circumstances described in the following risk factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.
Risks Related to Economic Conditions
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all our loans are to businesses and individuals in the state of Washington. A downturn in local or regional economic conditions, as a result of inflation, rising interest rates, , , natural , or other events, could materially affect our business, financial condition, and results of operations. economic developments in our primary market areas of Grays Harbor, Pierce, Thurston, King, Kitsap, and Lewis counties Washington, could also our growth, our customers’ ability to repay loans, and otherwise impact our business, financial condition, and results of operations.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
declines+2
unfunded+1
delinquent+1
substandard+1
slow+1
Positive rising
benefit+3
effective+1
improvements+1
stability+1
stable+1
MD&A (Item 7)
11,036 words
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.
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 branches (including its main office in Hoquiam). At September 30, 2025, the Company had total assets of $2.01 billion, net loans receivable of $1.46 billion, total deposits of $1.72 billion and total shareholders’ equity of $262.61 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 relates primarily to the Bank’s operations.
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 originates adjustable-rate residential mortgage loans, some of which do not qualify for sale in the secondary market. The Bank also originates commercial business loans and other consumer loans.
Weakness in the global economy, disruptions in supply chains, and changes in U.S. trade or immigration policies could adversely affect businesses in our markets, particularly those reliant on international trade or key industries such as construction and manufacturing. These developments may exacerbate labor shortages, reduce productivity, impair borrowers’ repayment capacity, increase costs, delay supply chains, lower credit demand, and heighten operational and cybersecurity risks, thereby negatively impacting our business and financial performance.
A deterioration in economic conditions in the market areas we serve could result in:
• Higher loan delinquencies, problem assets and foreclosures;
• an increase in our ACL;
• the slowing of foreclosed asset sales;
• a decline in demand for our products and services;
• a decline in collateral values linked to our loans, thereby diminishing borrowing capacities and asset values tied to existing loans;
• a decline in the net worth and liquidity of loan guarantors, which may impair their ability to honor commitments to us; and
• a reduction in our low-cost or non-interest-bearing deposits.
Because our loan portfolio is more geographically concentrated than those of larger financial institutions, adverse changes in Washington’s economy, including those tied to immigration policy shifts, may have a greater impact on our earnings and capital. Any deterioration in real estate markets could significantly affect borrowers’ repayment capabilities and collateral values. Real estate values are affected by a range of factors, including economic conditions, regulatory changes, natural disasters, and trade-related issues affecting construction costs and material availability. If we must liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Monetary policy, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations.
Our financial performance and operations are influenced by monetary, fiscal, and trade policies, including those of the Federal Reserve, the U.S. Treasury, and other governmental authorities. Actions by these authorities may lead to inflation, deflation, changes in interest rates, or other economic conditions that could materially adversely affect our results of operations. Tariffs, supply-chain disruptions, or rising costs could reduce the ability of our clients, particularly small- and medium-sized businesses, to repay loans, negatively affecting credit quality and financial performance. Prolonged inflation may increase operational costs, including wages and benefits, while fluctuations in interest rates and the yield curve can significantly impact our net interest income. Interest rates may not move in alignment with inflation or deflation, adding uncertainty to the economic environment.
Risks Related to our Lending Activities
Our real estate construction and land loans expose us to significant risks.
We specialize in real estate construction lending to individuals and builders, mainly focusing on residential property development. These loans are often originated regardless of whether the collateral property is subject to a sales contract. As of September 30, 2025, our construction loans totaled $223.89 million, comprising 14.2% of our overall loan portfolio. These loans were comprised of $186.75 million for residential real estate projects, $21.82 million for commercial projects, and $15.32 million for land development projects. Approximately $130.34 million of our residential construction loans are structured to convert into permanent loans upon construction completion.
Construction lending is inherently risky due to the difficulty in accurately estimating project costs and values. Volatility in construction costs, market demand, and regulatory conditions can result in significant deviations from initial projections, complicating the assessment of total project funding needs and loan-to-value ratios. This type of lending often involves larger principal amounts and may be concentrated among a limited number of borrowers, increasing our exposure to individual credit relationships.
A downturn in the housing or broader real estate markets could lead to increased delinquencies, defaults, and foreclosures, and may impair the value of the collateral securing these loans. In cases where borrowers have multiple outstanding loans, financial distress on one project may adversely affect their ability to service other obligations. Additionally, certain construction loans do not require periodic payments during the construction phase, resulting in interest being capitalized into the loan balance. Repayment of these loans is therefore highly dependent on the borrower’s ability to sell, lease, or refinance the completed property.
If we misjudge the value of a project or the borrower’s ability to complete and monetize it, we may be left with insufficient collateral and incur losses. Construction lending also requires active monitoring, including cost tracking and site inspections, which increases operational complexity and expense. Rising interest rates may further impact the affordability of completed homes for end-purchasers, potentially reducing demand and impairing the borrower’s ability to repay.
Properties under construction are generally illiquid and may require completion before they can be sold, complicating resolution strategies for problem loans. In some cases, we may need to provide additional funding or engage alternative builders, which introduces further cost and market risk. Speculative construction loans, where no end-purchaser is identified at origination, present heightened risk. As of September 30, 2025, $10.75 million of our construction portfolio consisted of speculative one- to four-family construction loans.
We also originate land loans for acquisition purposes, which may be intended for future development or recreational use. As of September 30, 2025, land loans totaled $35.95 million or 2.3% of our total loan portfolio. These loans carry additional risks due to extended development timelines, susceptibility to real estate market fluctuations, potential delays from economic or political factors, and the generally illiquid nature of land as collateral. During the financing-to-completion period, the collateral typically does not generate cash flow.
As of September 30, 2025, one construction totaling $553,000 was on non-accrual. A significant rise in non-performing construction or land loans could materially and adversely impact our financial condition and results of operations.
Our emphasis on commercial real estate lending may expose us to increased lending risks.
Our business strategy includes a significant focus on commercial real estate lending. While this type of lending may offer higher yields than single-family residential lending, it is generally more sensitive to regional and local economic conditions, which can make loss levels more difficult to predict. Evaluating collateral and analyzing borrower financial information for commercial real estate loans requires more detailed underwriting and ongoing monitoring compared to residential lending. In addition, many of our commercial borrowers maintain multiple credit relationships with us. Consequently, an adverse development affecting one loan or project may impair the borrower’s ability to repay other obligations, increasing our exposure to credit risk.
At September 30, 2025, we had $610.69 million of commercial real estate loans, representing 38.8% of our total loan portfolio. These loans typically involve larger principal amounts and rely on income generated, or expected to be generated, by the underlying property to meet operating expenses and debt service. Any deterioration in economic conditions or local market conditions, such as reduced leasing activity or non-renewal of leases, may impair the borrower’s ability to repay the loan.
Commercial real estate loans also expose a lender to greater credit risk than loans secured by residential real estate due to the relative illiquidity of the collateral. Many of these loans are not fully amortizing and include large balloon payments at maturity, which may require the borrower to refinance or sell the property. If market conditions are unfavorable, the borrower may be unable to do so, increasing the risk of default.
Unlike residential mortgage loans, commercial real estate loans generally lack a robust secondary market, limiting our ability to mitigate credit risk through loan sales. In the event of foreclosure, the holding period for commercial properties is typically longer as a result ot fewer potential buyers, which may result in larger charge-offs relative to the principal amount outstanding.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
At September 30, 2025, we had $127.0 million, or 8.1%, of total loans in commercial business loans. These loans are primarily underwritten based on the borrower’s projected cash flows, with collateral serving as a secondary source of repayment. This reliance on cash flow introduces significant risk, as borrower revenues may be volatile and subject to economic, industry-specific, or operational disruptions.
Collateral for these loans often consists of accounts receivable, inventory, or equipment, which may fluctuate in value, be difficult to appraise, lack liquidity, or depreciate over time. Loans secured by accounts receivable are particularly vulnerable to the borrower’s ability to collect from their customers, while inventory and equipment may be subject to obsolescence or market shifts.
Economic downturns, supply chain disruptions, inflationary pressures, or other adverse conditions may impair borrowers’ ability to generate sufficient cash flow to service their obligations. Compared to loans secured by real estate, commercial business loans may be more susceptible to rapid deterioration in credit quality, and recovery upon default may be more limited due to the nature of the collateral.
Our business may be adversely affected by credit risk associated with residential property.
At September 30, 2025, $368.17 million, or 23.4% of our total loan portfolio, was comprised of one- to four-family mortgage loans and home equity loans. This type of lending is particularly sensitive to regional economic conditions, which may impair borrowers’ ability to meet their payment obligations and make loss levels difficult to predict. Factors such as higher interest rates, recessionary conditions, declining real estate sales volumes and prices, and elevated unemployment may contribute to higher loan delinquencies, problem assets, and reduced demand for our lending products, which could adversely affect our capital, liquidity, and financial condition.
A decline in residential real estate values, particularly in the Washington housing market, may reduce the value of collateral securing these loans and increase our risk of loss in the event of borrower default. Some of our residential mortgage loans are secured by properties with little or no borrower equity, either due to high loan-to-value ratios at origination or subsequent declines in property values. These loans are more vulnerable to default and loss in a declining market.
Additionally, home equity lines of credit secured by second mortgages present heightened risk. In the event of default, recovery of loan proceeds may be limited unless the first mortgage is repaid, which may not be economically justified based on the property’s current value. As a result, we may experience higher rates of delinquency, default, and credit losses within our residential loan portfolio, which could materially and adversely impact our financial performance.
Our allowance for credit losses on loans may not be sufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business. Every loan carries a risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
• the cash flow of the borrower and/or the project being financed;
• the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
• the duration of the loan;
• the credit history of a particular borrower; and
• changes in economic and industry conditions.
To address these risks, we maintain an ACL on loans, which is a reserve established through a provision for credit losses on loans charged against operating income. We believe the ACL is appropriate to provide for expected losses in our loan portfolio. The level of the ACL is determined by management through periodic comprehensive reviews and consideration of several factors, including, but not limited to our collective loss reserve, for loans evaluated on a pool basis with similar risk characteristics based on our life of loan historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements, management’s expectations of future events and certain qualitative factors.
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. For loans that do not share similar risk characteristics and cannot be evaluated on a collective basis, we evaluate the loan individually using the present value of the expected future cash flows or the fair value of the underlying collateral.
The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires us to make significant estimates of credit risks and future trends, all of which may change materially. If our estimates are incorrect, the ACL for loans may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in the ACL
through additional provisions, which would reduce income. Management also recognizes that significant growth in loan portfolios, new loan products and the refinancing of existing loans may result in unseasoned portfolios that do not perform in line with historical or projected trends, increasing the risk that our ACL may be insufficient. Deterioration in economic conditions, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may also require an increase in the ACL.
Bank regulatory agencies also periodically review our ACL and may require us to increase the provision or recognize further charge-offs based on their judgment. If charge-offs exceed the ACL, we may need additional provisions, which would reduce net income and could materially and adversely affect our financial condition, results of operations, liquidity, and capital.
If our non-performing assets increase, our earnings will be adversely affected.
At September 30, 2025, our non-performing assets (which consisted solely of non-accruing loans, non-accrual investment securities, and OREO) were $4.66 million, or 0.23% of total assets. Our non-performing assets adversely affect our net income in various ways:
• We do not record interest income on non-accrual loans or non-performing investment securities, except on a cash basis when the collectability of the principal is not in doubt.
• We must recognize expected credit losses through a current period charge to the provision for credit losses.
• Non-interest expense increases if we must write down the value of OREO properties to reflect market declines.
• Non-interest income decreases when we recognize other-than-temporary impairment on non-performing investment securities.
• There are legal fees and carrying costs (such as taxes, insurance, and maintenance) associated with OREO.
• Managing non-performing assets requires significant management attention, diverting resources from more profitable activities.
If delinquencies increase and we are unable to effectively manage our non-performing assets, our losses and troubled assets could increase significantly, which could materially and adversely impact our financial condition and results of operations.
Risk Related to our Business Strategy
We may be adversely affected by risks associated with completed and potential acquisitions.
As part of our general growth strategy, on October 1, 2018, we completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington. Although our business strategy emphasizes organic expansion, we continue to evaluate potential acquisition opportunities. There can be no assurance that we will successfully identify suitable acquisition candidates, complete acquisitions or successfully integrate acquired operations into our existing operations or expand into new markets.
The consummation of any future acquisitions may dilute shareholder value or adversely affect our operating results during the integration period. Once integrated, acquired operations may not achieve levels of profitability comparable to our existing operations or otherwise perform as expected. In addition, transaction-related expenses may reduce earnings. These adverse effects on our earnings and results of operations may negatively impact the value of our common stock.
Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:
• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially and adversely affected;
• We could experience higher than expected deposit attrition, which could reduce funding sources and impact liquidity;
• The integration of systems, procedures, and personnel is complex and time-consuming, and may disrupt customer relationships and internal operations. If integration is not executed effectively, we may fail to realize anticipated synergies or economic benefits, and may lose customers or employees of the acquired business;
• To the extent that our acquisition costs exceed the fair value of net assets acquired, we will record goodwill. We are required to assess goodwill for impairment at least annually, and any impairment charge could materially and adversely affect our results of operations and financial condition; and
• While we expect acquisitions to contribute to net income , they may also increase general and administrative expenses, which could raise our efficiency ratio. If integration efforts are unsuccessful, acquisitions may not be accretive to earnings in the short or long term.
Risk Related to Market Interest Rates
Changes in interest rates may reduce our net interest income and may result in higher defaults in a rising rate environment.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of governmental and regulatory agencies, particularly the Federal Reserve. Following a period of monetary easing that began in the second half of 2024, the Federal Open Market Committee (FOMC) of the Federal Reserve reduced the target range for the federal funds rate by a cumulative 125 basis points through September 2025, bringing the target range to 4.00% to 4.25%. On October 29, 2025, subsequent to quarter-end, the FOMC announced a further 25‑basis‑point cut, bringing the target range to 3.75% to 4.00%. These changes have modestly lowered funding costs but have also contributed to narrower loan yields and reinvestment risk within the investment securities portfolio. Further rate decreases could negatively impact our net interest income, although they may benefit the housing market by increasing refinancing activity and new home purchases.
We principally manage interest rate risk by managing the volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including interest rate shifts, may affect: (1) the interest we earn on loans and investments and the interest we pay on deposits and borrowings; (2) our ability to originate and/or sell loans and attract deposits; (3) the fair value of our financial assets and liabilities, which may impact shareholders’ equity and our ability to realize gains from the sale of such assets; (4) our competitiveness in attracting and retaining deposits relative to other investment alternatives; (5) the ability of our borrowers to repay adjustable or variable rate loans; and (6) the average duration of our investment securities and other interest-earning assets.
If the interest rates paid on deposits and borrowings increase at a faster rate than the interest received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Similarly, if rates earned decline more rapidly than rates paid, our margins may compress. In a volatile rate environment, we may not be able to manage this risk effectively, which could materially affect our business, financial condition, and results of operations.
Interest rate changes may also impair borrowers’ ability to repay existing obligations or reduce our margins and profitability. Our net interest margin, the difference between the yield on interest-earning assets and the cost of funding, may be negatively impacted if asset yields and funding costs move at different speeds. A flattening or inverted yield curve, where short-term rates approach or exceed long-term rates, may compress our margin due to the shorter duration of our liabilities relative to our assets. Also, falling interest rates may lead to increased prepayments of loans and mortgage-backed securities, requiring us to reinvest proceeds into lower-yielding assets, which could reduce income. A sustained increase or decrease in market interest rates could adversely affect our earnings.
As is the case with many financial institutions, our emphasis on increasing core deposits, those deposits bearing no or a relatively low rate of interest with no stated maturity, has resulted in our having a significant amount of these deposits which have a shorter duration than our assets. At September 30, 2025, we had $406.99 million in certificates of deposit that mature within one year and $1.27 billion in non-interest bearing, NOW checking, savings and money market accounts. Retaining these deposits in a rising rate environment may require us to offer higher rates, increasing our cost of funds. In addition, a substantial amount of our residential mortgage loans and home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.
Changes in interest rates also affect the fair value of our investment securities available for sale. Generally, fixed-rate securities decline in value when interest rates rise. Unrealized gains and losses on these securities are reported as a separate component of equity, net of tax, through accumulated other comprehensive income (loss) ("AOCI"). Rising rates may reduce the fair value of these securities and negatively impact shareholders’ equity.
Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions may not fully capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by, or other adverse events affecting, the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. We regularly analyze investment securities to determine whether there have been
any events or economic circumstances to indicate that a security has incurred a credit-related loss. In making these assessments, we consider many factors including recent events specific to the issuer or industry, and for securities, external credit ratings and recent downgrades. Credit-related losses are recorded in the ACL in the income statement when the present value of expected future cash flows is less than the amortized cost. Losses not related to credit are recorded in other comprehensive income (loss) when we (1) do not intend to sell the security, or (2) are not more likely than not to sell the security prior to its anticipated recovery. There can be no assurance that declines in market value will not result in credit-related losses or accounting charges, which could have a material adverse effect on our business, financial condition, and results of operations.
An increase in interest rates, change in the programs offered by Freddie Mac or our ability to qualify for their programs may reduce our mortgage revenues, which would negatively impact our non-interest income.
The sale of residential mortgage loans to Freddie Mac has historically provided a significant portion of our noninterest income. Any future changes in its program, including our eligibility to participate in such program, the criteria for loans to be accepted or laws that significantly affect the activity of Freddie Mac could, in turn, materially adversely affect our results of operations if we could not find other purchasers. Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, the demand for mortgage loans, particularly refinancing of existing mortgage loans, tends to fall and our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold. This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expense associated with our loan sale activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans to Freddie Mac or into the secondary market without recourse, we are required to give customary representations and warranties about the loans we sell. If we breach those representations and warranties, we may be required to repurchase the loans and we may incur a loss on the repurchase.
Risks Related to Laws and Regulations
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we do not have a concentration in commercial real estate lending because our balance in commercial real estate loans (including owner-occupied loans) at September 30, 2025 represented 283.05% of total capital. While we believe that we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations.
The financial services industry is extensively regulated. Federal banking regulations are designed primarily to protect deposit insurance funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose significant limitations on our operations. Along with existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations, they govern how financial institutions conduct business, implement strategic initiatives, comply with tax obligations, and report financial results. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.
Any new regulations or legislation, changes in existing regulations or oversight, or changes in regulatory interpretation could materially impact our operations, increase our costs of compliance and doing business, and adversely affect our profitability.
For example, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published guidance in 2014, supplemented by subsequent updates, allowing financial institutions to serve cannabis-related businesses operating legally under state law, provided institutions comply with required regulatory oversight. Pending or proposed federal legislation, such as the SAFER Banking Act (formerly the SAFE Banking Act), has been reintroduced in Congress but has not been enacted as of September 30, 2025. If passed, it could provide additional protections to banks serving cannabis businesses in legal states. Recent Washington State regulatory developments, including limits on retail cannabis licenses per owner, updated reporting requirements, and ongoing rulemaking by the Washington Liquor & Cannabis Board, could affect the financial profile and operations of cannabis-related businesses. At September 30, 2025, approximately 0.9% of our total deposits and a portion of our service charges from deposits were from legal cannabis-related businesses. Any adverse change to FinCEN guidance, continued failure of federal legislation to pass, new regulatory requirements, or changes in federal or state regulatory policy or interpretation could negatively affect our non-interest income, increase our operating costs, and materially impact our profitability.
In addition, evolving regulatory expectations regarding anti-money laundering compliance, cybersecurity, and capital and liquidity requirements could further increase our costs of operations and compliance. State regulations governing financial institutions, including those related to cannabis banking and fintech activities, are also subject to change, which may have additional implications for our business.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to implement programs to prevent their operations from being used for money laundering, terrorist financing, or other illicit activities. Financial institutions must file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network and establish procedures to verify the identity of customers seeking to open new financial accounts. Failure to maintain or implement effective anti-money laundering and counter-terrorist financing programs could result in fines, sanctions, regulatory investigations, limitations on strategic transactions, or reputational harm. Any of these outcomes could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Climate change and related legislative and regulatory initiatives may materially affect our business and results of operations.
The effects of climate change continue to raise significant concerns about the state of the environment. However, under the current administration, federal policy has shifted to reduce emphasis on climate change initiatives and environmental regulations. This includes scaling back federal involvement in international agreements like the Paris Agreement and easing regulatory pressures on businesses, including banks, to address climate-related risks. Legislative and regulatory proposals aimed at combating climate change may face increased scrutiny or reduced priority under this administration.
The lack of empirical data regarding the financial and credit risks posed by climate change still makes it difficult to predict its specific impact on our financial condition and results of operations. However, the physical effects of climate change, such as more frequent and severe weather disasters, could directly affect us. For instance, such events may damage real property securing loans in our portfolios or reduce the value of that collateral. If our borrowers' insurance is insufficient to cover these losses or if insurance becomes unavailable, the value of the collateral securing our loans could be negatively affected, potentially impacting our financial condition and results of operations. Moreover, climate change may adversely affect regional and local economic activity, harming our customers and the communities in which we operate. Regardless of changes in federal policy, the effects of climate change and their unknown long-term impacts could still have a material adverse effect on our financial condition and results of operations.
Risks Related to Cybersecurity, Third Parties and Technology
As of September 30, 2025 there has not been any cybersecurity or related breach of the risk factors discussed below that would require disclosure.
The financial services market is undergoing rapid technological changes and, if we are unable to stay current with those changes, we may not be able to effectively compete.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success will depend, in part, on our ability to keep pace with technological innovation, including digital banking platforms, artificial intelligence, and data analytics, and to use technology to satisfy and grow customer demand for our products and services, enhance the customer experience, and to create additional efficiencies in
our operations. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively implement emerging technologies or digital solutions, maintain cybersecurity, prevent system failures, or manage operational disruptions associated with technology, or successfully market these innovations to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to prevent the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Our systems, software, and networks are vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code, artificial intelligence-driven attacks, and cyber-attacks. If any of these events occur, they could compromise our or our clients’ confidential information, disrupt operations, or harm our clients or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Security breaches in our internet banking activities present additional risks of liability and reputational harm. Increases in criminal activity levels and sophistication, advances in computer capabilities, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments increases the likelihood of a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. Any compromise or breach of our security measures could result in losses to us or our customers, the loss of business and/or customers, damage to our reputation, additional expenses, disruptions to our operations, limitations on our ability to grow our online services or other businesses, increased regulatory scrutiny or penalties, or exposure to civil litigation and potential financial liability. Any of these events could have a material adverse effect on our business, financial condition, and results of operations.
Our security measures may not protect us from system failures or interruptions. Our business depends on the continuous and reliable functioning of our information technology infrastructure, including systems used for data processing, transaction execution, customer communications, and other critical operations. Failures, interruptions, or delays, whether caused by hardware or software defects, human error, cyber-attacks, utility or telecommunications outages, or other disruptions, can impair our ability to process transactions, deliver products and services, and maintain accurate records. We also rely on third-party vendors for significant data processing and operational functions, and their systems and controls are outside our direct oversight. Breakdowns, service interruptions, capacity constraints, cyber-attacks, security breaches, or other operational failures at these providers, as well as failures in communication networks or connectivity, can disrupt our operations and limit our ability to serve customers. Identifying and transitioning to alternate vendors, if available, requires substantial cost, time, and operational effort. Processing customer information through additional vendors and their personnel further increases exposure to information-security, privacy, and operational risks. Any of these failures or interruptions may result in operational delays, financial losses, customer harm, regulatory scrutiny, penalties, reputational damage, and other adverse consequences that may materially affect our business, financial condition, and results of operations.
We cannot assure you that these failures, interruptions, or breaches will not occur or that they will be adequately addressed by us or by the third parties on which we rely. We may not be insured against all types of losses associated with these events, and available coverage may be inadequate. If a third-party service provider experiences financial, operational, or technological difficulties, or if there is any other disruption in our relationship with that provider, we may be required to identify alternative sources of service, which may not be available on comparable terms or without significant additional resources. Any such occurrence may damage our reputation, result in a loss of customers and business, increase regulatory scrutiny, or expose us to legal liability, any of which may have a material adverse effect on our business, financial condition, and results of operations.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
We are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses, increased costs, disclosure or misuse of our information or our customers' information, misappropriation of assets, privacy breaches, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes.
While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.
The increasing adoption of AI in financial services presents significant opportunities but also introduces a range of risks that could impact our operations, regulatory compliance, and customer trust. AI introduces model risk, where flawed algorithms or biased data could result in inaccurate credit decisions, compliance violations, or discriminatory outcomes in lending or customer service. Cybersecurity threats, such as data breaches, adversarial attacks, and data poisoning, pose significant challenges, particularly as these systems handle large volumes of sensitive customer information. Additionally, the opaque nature of some AI models, often referred to as "black-box" systems, raises regulatory compliance concerns, as regulators increasingly require transparency and explainability in AI-driven decision-making.
Operational risks also arise from potential system failures, over-reliance on AI, and integration challenges with existing infrastructure. Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and customer support. Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny.
To mitigate these risks requires a robust governance framework, regularly testing and auditing of AI models, and strong human oversight. Investments in cybersecurity, data privacy protections, and employee training are critical to managing these risks.
Risks Related to Accounting Matters
The Company’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpectedlosses in the future.
The Company’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment regarding the most appropriate manner to report the Company’s financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in the Company’s reporting materially different results than would have been reported under a different alternative.
Certain accounting policies, most notably the accounting for expected credit losses, are critical to presenting the Company’s financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates, particularly in the current environment of inflationary pressures, interest rate volatility, changing credit quality trends, and evolving regulatory guidance. For more information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” contained in this 2025 Form 10-K.
We may experience future goodwill impairment, which could reduce our earnings.
In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Changes in market conditions, regulatory developments, or economic uncertainty could increase the likelihood of goodwill impairment. Any such charge could have a material adverse effect on our results of operations.
We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.
Our business operations are significantly influenced by the extensive body of accounting regulations in the United States, which are subject to periodic updates and changes. Regulatory bodies, including the FASB and the SEC, periodically issue new guidance or alter existing accounting rules and reporting requirements, which can substantially impact the preparation and reporting of our financial statements. These changes may require us to adopt new accounting standards, leading to potential
adjustments in how we report our financial position, performance, and risk exposures. Additionally, such regulatory changes could necessitate retrospective application, which might result in the restatement of prior period financial statements.
One such significant change in fiscal 2024 was the implementation of the CECL model, which we adopted on October 1, 2023. Under the CECL model, financial assets carried at amortized cost, such as loans and held-to-maturity debt securities, are presented at the net amount expected to be collected. This forward-looking approach in estimating expected credit losses contrasts with the prior, "incurred loss" model, which delays recognition until a loss is probable. CECL mandates considering historical experience, current conditions, and reasonable forecasts affecting collectability, leading to periodic adjustments of financial asset values. The methodology incorporates macroeconomic forecasts and assumptions, including trends in interest rates, inflation, unemployment, and industry-specific factors. However, this forward-looking methodology, reliant on macroeconomic variables, introduces the potential for increased earnings volatility due to unexpected changes in these indicators between periods. An additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on the effective interest method, and credit losses, recognized upfront at origination. This asymmetry might create the perception of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses. Conversely, periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where losses had been previously recognized.
Future adjustments under CECL could materially impact our results of operations, financial condition, and reported profitability, particularly under volatile economic conditions or unexpected credit deterioration.
We may experience decreases in the fair value of our loan servicing rights, which could reduce our earnings.
Loan servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with servicing rights retained. At September 30, 2025, our loan servicing rights totaled $815,000. Loan servicing rights are amortized to servicing income on loans sold over the period of estimated net servicing income. The estimated fair value of loan servicing rights at the date of the sale of loans is determined based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and prepayment rates on the underlying loans. On a quarterly basis, we evaluate the fair value of loan servicing rights for impairment by comparing actual cash flows and estimated cash flows from the loan servicing assets to those estimated at the time loan servicing assets were originated. Our methodology for estimating the fair value of loan servicing rights is highly sensitive to changes in assumptions, such as prepayment speeds, mortgage refinance activity, and housing market conditions. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the loan servicing rights portfolio. For example, a decrease in interest rates typically increases the prepayment speeds of loan servicing rights and therefore decreases the fair value of the loan servicing rights. Conversely, slower-than-expected prepayments or rising interest rates may increase the fair value of these assets, but may also affect the timing of income recognition.
Future decreases in interest rates could decrease the fair value of our loan servicing rights below their recorded amount, which would decrease our earnings.
If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation allowances, our earnings could be reduced .
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property is taken in as OREO, and at certain other times during the asset's holding period. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated estimated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value. If our valuation process is incorrect or if the property declines in value after foreclosure, the fair value of our OREO may not be sufficient to recover our NBV in such assets, resulting in the need for a valuation allowance.
In addition, bank regulators periodically review any OREO we may have and may require us to recognize further valuation allowances. Significant charge-offs to our OREO may have an adverse effect on our financial condition and results of operations.
Other Risks Related to Our Business
Ineffective liquidity management could adversely affect our financial results and condition.
Liquidity is essential to our business. We rely on several sources to meet our liquidity needs, including deposits, cash flows from loan repayments, our securities portfolio, and borrowings. An inability to raise funds from these sources could have a
substantial negative effect on our liquidity. Replacing maturing deposits and borrowings may be challenging due to changes in our financial condition, the financial condition of the FHLB or FRB, or broader market conditions. Factors that could limit our access to liquidity include a decrease in business activity in the Washington markets where our loans and deposits are concentrated, negative operating results, adverse regulatory action, disruptions in the financial markets, or negative views and expectations regarding the financial services industry.
Any decline in available funding in amounts sufficient to finance our operations or on acceptable terms could impair our ability to originate loans, invest in securities, meet operating expenses, repay borrowings, or satisfy deposit withdrawal demands. These events could have a material adverse effect on our business, financial condition, and results of operations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” of this Form 10-K.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be exceedingly high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. If we are able to raise capital, it may not be on terms that are acceptable to us. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may dilute the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
Our framework for managing risks may not be effective in mitigating risk and loss to us.
Our business is exposed to a broad range of risks, including liquidity, credit, market, interest rate, operational, legal and compliance, reputation, and other risks. These risks may arise from internal factors, the actions of third parties, changes in economic conditions, or other unforeseen events. There may be risks that we have not anticipated or identified, and existing or emerging risks could result in substantial and unexpectedlosses. If our risk management proves ineffective, we may incur significant losses, which could materially and adversely affect our business, financial condition, results of operations, and growth prospects.
We are dependent on key personnel, and the loss of one or more of those key personnel may materially and adversely affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense, and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our Chief Executive Officer and certain other employees. In addition, our success has been and continues to be highly dependent upon the services of our directors, and we may not be able to identify and attract suitable candidates to replace such directors.
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, which is 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. Management attempts to maintain a net interest margin and return on average assets ("ROA") placing it within the top quartile of its Washington State peers.
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, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds, which stood at 4.00% to 4.25% as of September 30, 2025. Subsequent to fiscal year end, the FOMC reduced the target federal funds rate by 25 basis points.
The provision for (recapture of) credit losses on loans 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 the Company believes is adequate to cover expected credit losses inherent in its loan portfolio. The Company recorded a provision for credit losses on loans of $853,000 for the year ended September 30, 2025, primarily due to increased loan portfolio growth. The Company recorded a provision for credit losses on loans of $1.25 million for the year ended September 30, 2024, primarily due to increased loan portfolio growth.
Net income is also affected by non-interest income and non-interest expense. For the year ended September 30, 2025, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, BOLI cash surrender value increases and death benefit, servicing income on loans, escrow fees and other operating income. Non-interest income is also increased by a gain on sale and net recoveries of OTTI on investment securities, if any. Non-interest income in certain periods can also be 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, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, technology and communications expenses, deposit operation expenses and other non-interest expenses. Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and by gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number and balances of loan and deposit accounts.
Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Operating Strategy
The Company is a bank holding company which operates primarily through its subsidiary, the Bank. The Company's primary objective is to operate the Bank as a well-capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area of Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties. The Company's strategy is to provide products and superior service to small businesses and individuals located in its primary market area.
The Company's goal is to deliver returns to shareholders by focusing on the origination of higher-yielding assets (in particular, commercial real estate, construction, and commercial business loans), increasing core deposit balances, managing problem assets, efficiently managing expenses, and seeking expansion opportunities. The Company seeks to achieve these results by focusing on the following objectives:
Expand our presence within our existing market areas by capturing opportunities resulting from changes in the competitive environment. We currently conduct our business primarily in western Washington. We have a community bank strategy that emphasizes responsive and personalized service to our customers. As a result of the consolidation of banks in our market areas, we believe that there is an opportunity for a community and customer focused bank to expand its customer base. By offering timely decision making, delivering appropriate banking products and services, and providing customer access to our senior managers, we believe that community banks, such as Timberland Bank, can distinguish themselves from larger banks operating in our market areas. We believe that we have a significant opportunity to attract additional borrowers and depositors and expand our market presence and market share within our extensive branch footprint.
Portfolio diversification. In recent years, we have limited the origination of speculative construction loans and land development loans in favor of loans that possess credit profiles representing less risk to the Bank. We continue originating owner/builder and custom construction loans, multi-family loans, commercial business loans and commercial real estate loans which offer higher risk adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than fixed-rate one-to four-family loans. We anticipate capturing more of each customer's banking relationship by cross selling our loan and deposit products and offering additional services to our customers.
Increase core deposits and other retail deposit products. We focus on establishing a total banking relationship with our customers with the intent of internally funding our loan portfolio. We anticipate that the continued focus on customer relationships will increase our level of core deposits. In addition to our retail branches, we maintain technology based products such as business cash management and a business remote deposit product that enable us to compete effectively with banks of all sizes.
Managing exposure to fluctuating interest rates. For many years, the majority of the loans the Bank has retained in its portfolio have generally possessed periodic interest rate adjustment features or have been relatively short-term in nature. Loans originated for portfolio retention have generally included ARM loans, short-term construction loans, and, to a lesser extent, commercial business loans with interest rates tied to a market index such as the Prime Rate. Longer term fixed-rate mortgage loans have generally been originated for sale into the secondary market, although from time to time, the Bank may retain a portion of its fixed-rate mortgage loan originations and extend the initial fixed-rate period of its hybrid ARM commercial real estate loans for asset/liability purposes.
Continue generating revenues through mortgage banking operations. The majority of the fixed-rate residential mortgage loans we originate have historically been sold into the secondary market with servicing retained. This strategy produces gains on the sale of such loans and reduces the interest rate and credit risk associated with fixed-rate residential lending. We continue to originate custom construction and owner/builder construction loans for sale into the secondary market upon the completion of construction.
Maintaining strong asset quality. We believe maintaining strong asset quality is key to our long-term financial success. Non-performing assets, consisting of nonaccrual loans and investment securities, and OREO, totaled $4.44 million at September 30, 2025, compared to $3.94 million at September 30, 2024. The percentage of non-performing loans to loans receivable, net was 0.30% and 0.27% at September 30, 2025 and 2024, respectively. The percentage of non-performing assets to total assets at September 30, 2025 was 0.22% compared to 0.20% at September 30, 2024. We remain focused on reducing the level of non-performing assets through collections, write-downs and modifications. Our efforts include proactive steps to resolve our non-performing loans such as negotiating payment plans, forbearances, loan modifications and loan extensions, and accepting short payoffs on delinquent loans when appropriate. While the Company continues to emphasize lending in areas such as commercial real estate loans, construction loans, and commercial business loans, we remain committed to managing credit risk through the expertise of seasoned bankers and a conservative lending strategy.
Selected Financial Data
The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company and its subsidiary at and for the dates indicated. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiary presented herein.
At September 30,
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets
Loans receivable, net
Investment securities held to maturity
Investment securities available for sale
FHLB stock
Other investments
Cash and due from financial institutions and interest-bearing deposits in banks
Certificate of deposits held for investments
BOLI
OREO and other repossessed assets
Deposits
FHLB borrowings
Shareholders' equity
Year Ended September 30,
(In thousands, except per share data)
SELECTED OPERATING DATA:
Interest and dividend income
Interest expense
Net interest income
Provision for credit losses - net
Net interest income after provision for credit losses
Non-interest income
Non-interest expense
Income before income taxes
Provision for income taxes
Net income
Net income per common share:
Basic
Diluted
Dividends per common share
Dividend payout ratio (1)
(1) Cash dividends to common shareholders divided by net income to common shareholders.
At September 30,
OTHER DATA:
Number of real estate loans outstanding
Deposit accounts
Full-service offices
At or For the Year Ended September 30,
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1)
Return on average equity (2)
Interest rate spread (3)
Net interest margin (4)
Average interest-earning assets to average interest-bearing liabilities
Non-interest expense as a percent of average total assets
Efficiency ratio (5)
Asset Quality Ratios:
Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net
Non-performing assets as a percent of total assets (6)
Allowance for credit losses as a percent of total loans receivable, net (7)
Allowance for credit losses as a percent of non-performing loans (8)
Net charge-offs (recoveries) to average outstanding loans
Capital Ratios:
Total equity-to-assets ratio
Average equity to average assets
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.
(4) Net interest income before provision for (recapture of) credit losses as a percentage of average interest-earning assets.
(5) Non-interest expenses divided by the sum of net interest income and non-interest income.
(6) Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing, non-accrual investment securities, OREO and other repossessed assets.
(7) Loans receivable is before the allowance for credit losses.
(8) Non-performing loans include non-accrual loans and loans past due 90 days or more and still accruing. For periods prior to 2024, TDRs that were on accrual status are not included.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.
See "Note 1-Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements contained in Item 8 of this report for a summary of significant accounting policies and the effect on our financial statements and the following:
Allowance for Credit Losses
The ACL is considered a critical accounting policy due to the significant judgment and subjectivity involved in its determination, as well as the potential for economic changes that could impact its adequacy. Adjustments to the ACL are made through the provision (recapture) for credit losses to ensure the ACL remains at an appropriate level, based on management’s assessment of general and specific loss reserves. Establishing the ACL involves material estimates, including economic conditions, collateral value, guarantor strength, loss exposure at default, the timing and amount of future cash flows on impaired loans, applicable loss factors for portfolio segments, and forecasted cash flow collectability over the contractual term of financial assets. These estimates are inherently subject to change and require careful evaluation. To ensure adequacy, we use systematic methodologies outlined in a formal policy that address both general valuation allowances and specific reserves for individual problem loans. Adjustments to the ACL are reflected through provisions for credit losses, which increase the ACL, or recaptures, which reduce it, both of which impact current period earnings.
The ACL is maintained at a level sufficient to provide for expected credit losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio. The ACL is comprised of a general component and a specific component. The general component establishes a reserve rate using historical life-of-loan default rates, current loan portfolio information, economic forecasts, and business cycle data. Statistical analysis determines life-of-loan default and loss rates for the quantitative component, while qualitative factors adjust expected loss rates for current and forecasted conditions. The qualitative factor methodology involves a blend of quantitative analysis and management judgement, reviewed quarterly. The specific component relates to loans that have been individually evaluated because all contractual amounts of principal and interest will not be paid as scheduled. Based on the individual analysis, a specific reserve may be established. The ACL is based upon factors and trends identified by us at the time financial statements are prepared. Although we use the best information available, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions beyond our control. While we believe the estimates and assumptions used in our 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 that may be required will not adversely impact our financial condition and results of operations. In addition, the ACL is subject to review the by Bank's regulators as part of the routine examination process, which may result in adjustments to the ACL based upon their judgment of information available to them at the time of their examination.
Fair Value Accounting and Measurement
We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. We include in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition. Additionally, for financial instruments not recorded at fair value we disclose, where required, our estimate of their fair value. For more information regarding fair value accounting, please refer to "Note 21-Fair Value Measurements" in the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Goodwill
Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which
would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairmentloss and compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the fair value exceeds the carry amount, then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairmentloss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairmentloss would be recognized as a charge to earnings.
Market Risk and Asset and Liability Management
General. Market risk is the risk of loss from adverse changes in market prices and rates. The Bank's market risk arises primarily from interest rate risk inherent in its lending, investment, deposit and borrowing activities. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Bank's financial condition and results of operations. The Bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.
Qualitative Aspects of Market Risk. The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the difference between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Bank's interest-earning assets by retaining in its portfolio short-term loans and loans with interest rates subject to periodic adjustments. The Bank relies on retail deposits as its primary source of funds. As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms of up to five years.
The Bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve originating ARM loans for its portfolio, maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to four-family residential mortgage loans, matching asset and liability maturities, investing in short-term securities, and originating fixed-rate loans for retention or sale in the secondary market while retaining the related loan servicing rights.
Sharp increases or decreases in interest rates may adversely affect the Bank's earnings. Management of the Bank monitors the Bank's interest rate sensitivity using a model provided by Kinective, a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry. Based on an interest rate shock analysis prepared by Kinective using data at September 30, 2025, an immediate increase in interest rates of 100 basis points would decrease the Bank’s projected net interest income by approximately 0.5%. An immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 2.6%. See “Quantitative Aspects of Market Risk” below for additional information. Management has sought to sustain the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, the Bank actively originates adjustable-rate loans for retention in its loan portfolio. Fixed-rate mortgage loans with maturities greater than seven years generally are originated for the immediate or future resale in the secondary mortgage market. Although the Bank has sought to originate ARM loans, the ability to originate such loans depends to a great extent on market interest rates and borrowers' preferences.
Consumer, commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans and, accordingly, reduce the Bank’s exposure to fluctuations in interest rates. At September 30, 2025, the consumer, commercial business and construction loan portfolios amounted to $52.51 million, $127.00 million and $223.89 million, respectively, or 3.3%, 8.1% and 14.2%, respectively, of total loans receivable.
Quantitative Aspects of Market Risk. The model provided for the Bank by Kinective estimates the changes in the economic value of equity ("EVE") and net interest income in response to a range of assumed changes in market interest rates. The model first estimates the level of the Bank's EVE (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment. In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The model then recalculates the Bank's EVE under different interest rate scenarios. The change in EVE under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk. The following table is provided by Kinective based on data at September 30, 2025:
Hypothetical
Net Interest Income (1)
Economic Value of Equity
Interest Rate
$ Change
% Change
$ Change
% Change
Scenario (2)
from Base
from Base
from Base
from Base
(Basis Points)
(Dollars in thousands)
BASE
(1) Does not include loan fees. Includes BOLI income, which is included in non-interest income in the consolidated financial statements.
(2) No rates in the model are allowed to go below zero.
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit decay, and should not be relied upon as indicative of actual results. The computations do not reflect any actions management may undertake in response to changes in interest rates.
For illustrative purposes, in the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 2.2% decrease in EVE and a 2.6% decrease in net interest income. In the event of a 100 basis point increase in interest rates, a 0.1% decrease in EVE and a 0.5% decrease in net interest income would be expected. The Bank’s asset and liability structure generally results in decreases in net interest income and EVE under the hypothetical interest rate scenarios modeled, with changes more pronounced in larger rate movements.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag changes in market rates. Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could possibly deviate significantly from those assumed in calculating the table.
Comparison of Financial Condition at September 30, 2025 and September 30, 2024
Total assets increased by $89.30 million, or 4.6%, to $2.01 billion at September 30, 2025 from $1.92 billion at September 30, 2024. The increase was primarily due to increases in total cash and cash equivalents and loans receivable net, partially offset by a decrease in investment securities.
Net loans receivable increased by $42.07 million, or 3.0%, to $1.46 billion at September 30, 2025 from $1.42 billion at September 30, 2024. Loan growth was concentrated in the mortgage-related portfolios, with the largest increase occurring in the in multi-family portfolio. These increases were partially offset by decreases in commercial business loans.
Investment securities (including investments in equity securities) decreased by $29.26 million, or 11.9%, to $215.97 million at September 30, 2025 from $245.22 million at September 30, 2024, primarily due to the maturities of U.S. Treasury investment securities and to a lesser extent, scheduled amortization. These decreases were partially offset by the purchase of additional U.S. government agency mortgage-backed investment securities and U.S. Treasury investment securities.
Total deposits increased by $68.97 million, or 4.2%, to $1.72 billion at September 30, 2025 from $1.65 billion at September 30, 2024, primarily due to increases in certificate of deposit, non-interest bearing demand, and NOW checking account balances. These increases were partially offset by decreases in money market and savings account balances.
Shareholders' equity increased by $17.20 million, or 7.0%, to $262.61 million at September 30, 2025 from $245.41 million at September 30, 2024. The increase was primarily due to net income for the year ended September 30, 2025 of $29.16 million,
partially offset by $8.09 million in dividends paid to shareholders and the repurchase of 179,966 shares of common stock for $5.76 million.
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 increased by $75.71 million, or 43.3%, to $250.65 million at September 30, 2025 from $174.94 million at September 30, 2024. The increase was primarily a result of increased deposits.
Investment Securities: Investment securities (including investments in equity securities) decreased by $29.26 million, or 11.9%, to $215.97 million at September 30, 2025 from $245.22 million at September 30, 2024. The decrease was primarily due to $41.22 million of maturities, prepayments, and scheduled amortization on held to maturity securities, and $28.32 million in maturities, prepayments, scheduled amortization, and the sale of $13.51 million in available for sale investment securities. The reduction in the portfolio also reflects management’s continued focus on maintaining liquidity and repositioning the investment portfolio in response to the prevailing interest rate environment. These decreases were partially offset by the purchase of $47.47 million in available for sale investment securities and $5.41 million in held to maturity investment securities. For additional details on investment securities, see "Item 1. Business - Investment Activities" and "Note 3 - Investment Securities" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
FHLB Stock : FHLB stock increased by $8,000, or 0.4%, to $2.05 million at September 30, 2025 from $2.04 million at September 30, 2024, as a result of the increase in total assets which increased the Bank's required investment in FHLB stock under the Federal Home Loan Bank's membership and borrowing requirements.
Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at both September 30, 2025 and 2024. This investment is utilized to help satisfy compliance with the Company's Community Reinvestment Act ("CRA") investment test requirements.
Loans Held for Sale: There were $1.13 million in loans held for sale at September 30, 2025 compared to none at September 30, 2024, primarily due to the timing and volume of mortgage banking loan sales. The Company generally sells longer-term fixed-rate residential loans for asset-liability management purposes and to generate non-interest income. The Company sold $22.60 million in loans during the year ended September 30, 2025 compared to $14.75 million for the year ended September 30, 2024. Loan sales increased over the past year primarily due to construction loans converting to permanent financing as higher interest rates continued to slow refinancing and purchase activity and thereby increased the proportion of loans being retained and subsequently sold through normal conversion cycles.
Loans Receivable, Net of Allowance for Credit Losses: Net loans receivable increased by $42.07 million, or 3.0%, to $1.46 billion at September 30, 2025 from $1.42 billion at September 30, 2024. The increase was primarily due to a $30.42 million increase in multi-family loans, a $18.57 million increase in one- to four-family loans, an $11.47 million increase in commercial real estate loans, a $6.59 million increase in land loans, a $4.69 million increase in gross construction loans and smaller changes in other categories. These increases were partially offset by a $18.41 million increase in the undisbursed portion of construction loans in process, a $12.01 million decrease in commercial business loans and smaller decreases in several other loan categories.
Loan originations increased by $59.46 million, or 23.6%, to $310.90 million for the year ended September 30, 2025 from $251.44 million for the year ended September 30, 2024. The increase in loan originations was primarily due to increases in originations of commercial real estate, construction, one- to four- family loans, consumer, and smaller increases in other categories. These increases were partially offset by a decrease in originations of commercial business loans. For additional information on loans, see "Item 1. Business - Lending Activities" and "Note 4 - Loans Receivable and Allowance for Credit Losses" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Premises and Equipment, Net: Premises and equipment increased by $198,000, or 0.9%, to $21.68 million at September 30, 2025 from $21.49 million at September 30, 2024. The increase was primarily due to increases to furniture and equipment, and building and improvements that was partially offset by normal depreciation. For additional information on premises and equipment, see "Item 2. Properties" and "Note 5 - Premises and Equipment" of the Notes of the Consolidated Financial Statements contained in Item 8 of this report.
Bank Owned Life Insurance ("BOLI"): BOLI decreased by $1.78 million, or 7.5%, to $21.83 million at September 30, 2025 from $23.61 million at September 30, 2024. The decrease was primarily due to a death benefit, which was partially offset by an increase in cash surrender values.
Goodwill: The recorded amount of goodwill remained unchanged at $15.13 million at both September 30, 2025 and September 30, 2024. The Company performed its annual review of goodwill during the quarter ended June 30, 2025 and determined that there was no impairment. As of September 30, 2025, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill. For additional information on goodwill, see "Note 7 - Goodwill and CDI" of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
CDI: CDI decreased by $180,000 or 39.9%, to $271,000 at September 30, 2025 from $451,000 at September 30, 2024 due to scheduled amortization. For additional information on CDI, see "Note 7 - Goodwill and CDI" of the Consolidated Financial Statements contained in Item 8 of this report.
Loan Servicing Rights, Net: Loan servicing rights decreased by $557,000, or 40.6%, to $815,000 at September 30, 2025 from $1.37 million at September 30, 2024, primarily due to the amortization of servicing rights, which was partially offset by additional capitalized Freddie Mac servicing rights for loans sold with servicing retained during the period. The principal amount of loans serviced for Freddie Mac and the SBA decreased by $13.55 million to $357.01 million at September 30, 2025 from $370.56 million at September 30, 2024, reflecting normal portfolio runoff and payoffs. For additional information on loan servicing rights, see "Note 8 - Loan Servicing Rights" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Operating Lease Right-of-Use Assets: Operating lease ROU assets increased by $1.47 million, or 99.9%, to $2.95 million at September 30, 2025 from $1.48 million at September 30, 2024. The increase was primarily due to the addition of an operating lease for the University Place branch (scheduled to open in December 2025), which was partially offset by the amortization of the ROU assets. Operating lease ROU assets at September 30, 2025 represented the present value of three operating leases on branch facilities and one administrative office. For additional information on leases, see "Note 9 - Leases" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Other Assets: Other assets decreased by $129,000, or 2.07%, to $6.11 million at September 30, 2025 from $6.24 million at September 30, 2024. The decrease was primarily due to decreases in miscellaneous receivables (including income tax receivables) and prepaid expenses.
Deposits: Deposits increased by $68.97 million, or 4.2%, to $1.72 billion at September 30, 2025 from $1.65 billion at September 30, 2024. The increase consisted of a $74.21 million increase certificate of deposit account balances, a $17.57 million increase in non-interest bearing account balances and a $12.27 million increase in NOW account balances. These increases were partially offset by a $30.77 million decrease in money market account balances and a $4.32 million decrease in savings account balances. The changes in deposit balances reflect customer preferences in the current interest rate environment, with growth in certificates of deposit and non-interest bearing accounts supporting funding stability, while declines in money market and savings accounts reflect shifts toward higher-yield or short-term investment alternatives. For additional information on deposits, see "Item 1. Business - Deposit Activities and Other Sources of Funds" and "Note 10 - Deposits" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
FHLB Borrowings: The Company maintains 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. At September 30, 2025, the Company had an available borrowing capacity of $619.92 million. The Company had $20.00 million in FHLB borrowings at September 30, 2025 and 2024. At September 30, 2025, FHLB borrowings consisted of three short-term borrowings: two totaling $15.00 million with scheduled maturities in May 2026, each bearing interest at 3.95% and one $5.00 million borrowing maturing in August 2026 with an interest rate of 4.03%. The borrowings provide the Company with a flexible source of liquidity and support its asset-liability management strategy, allowing the Bank to manage funding needs, respond to changes in deposit flows, and maintain adequate liquidity levels to support ongoing operations and loan growth. For additional information on FHLB borrowings, see "Note 11 - FHLB Borrowings and Other Borrowings" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Operating Lease Liabilities: Operating lease liabilities increased by $1.50 million or 95.4%, to $3.08 million at September 30, 2025 from $1.58 million at September 30, 2024, primarily due to the addition of an operating lease for the University Place branch, partially offset by required annual lease payments. The operating lease liability at September 30, 2025 represented the present value of three operating leases on branch facilities and one administrative office. For additional information on leases, see "Note 9 - Leases" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Other Liabilities and Accrued Expenses: Other liabilities and accrued expenses increased by $1.63 million, or 18.5%, to $10.45 million at September 30, 2025 from $8.82 million at September 30, 2024. The increase was primarily due to timing differences in the normal course of business, partially offset by a decrease in accrued interest payable.
Shareholders' Equity: Total shareholders' equity increased by $17.20 million, or 7.0%, to $262.61 million at September 30, 2025 from $245.41 million at September 30, 2024. The increase was primarily due to net income of $29.16 million , partially offset by the payment of $8.09 million in dividends to common shareholders and the repurchase of 179,966 shares of the Company's common stock for $5.76 million. For additional information on shareholders' equity, see the Consolidated Statements of Shareholders' Equity contained in Item 8 of this report.
Comparison of Operating Results for the Years Ended September 30, 2025 and 2024
Net income for the year ended September 30, 2025 increased by $4.88 million, or 20.1%, to $29.16 million from $24.28 million for the year ended September 30, 2024. Net income per diluted common share increased by $0.66, or 21.9%, to $3.67 for the year ended September 30, 2025 from $3.01 for the year ended September 30, 2024. The increase in net income was primarily due to a $6.03 million increase in net interest income, reflecting growth in average loan balances and a higher net interest margin, and a $1.22 million increase in non-interest income, primarily due to higher BOLI earnings, including a death benefit received during the period. These increases were partially offset by a $1.64 million increase in non-interest expense. While salaries and employee benefits remained the largest component of non-interest expense, the increase was modest, with the increase in total expense driven mainly by higher state and local taxes, and professional fees. Net income was also partially reduced by a $947,000 increase in the provision for income taxes, while the provision for credit losses decreased $217,000, reflecting stable credit quality during the period.
A more detailed explanation of the income statement categories is presented below.
Net Interest Income: Net interest income increased by $6.03 million, or 9.4%, to $70.20 million for the year ended September 30, 2025 from $64.17 million for the year ended September 30, 2024. The increase was primarily due to higher interest and dividend income resulting from increases in both the average yields and balances of loans, which outpaced the increase in interest expense resulting from increases in the average balance on interest-bearing liabilities.
Total interest and dividend income increased by $7.45 million, or 7.9%, to $102.28 million for the year ended September 30, 2025 from $94.83 million for the year ended September 30, 2024, due to an increase in the average yields on interest-earning assets, specifically loans and investment securities, as well as an increase in the average balance of loans. The average yield on interest-earning assets increased to 5.48% for the year ended September 30, 2025 from 5.24% for the year ended September 30, 2024. Average total interest-earning assets increased by $55.19 million, or 3.05%, to $1.87 billion for the year ended September 30, 2025 from $1.81 billion for the year ended September 30, 2024, due to an increase in the average balance of loans receivable and an increase in the average balance of interest-bearing deposits in banks and CDs, which was partially offset by a decrease in the average balance of investment securities. Interest income on loans receivable and loans held for sale increased by $8.10 million, or 10.45%, to $85.53 million for the year ended September 30, 2025 from $77.43 million for the year ended September 30, 2024, primarily due to a $69.27 million increase in the average balance of loans receivable coupled with an increase in the average yield on loans receivable to 5.90% for the year ended September 30, 2025 from 5.61% for the year ended September 30, 2024.
During the year ended September 30, 2025, the accretion of the purchase accounting fair value discount on loans acquired increased interest income on loans by $104,000 compared to $37,000 for the year ended September 30, 2024. The accretion of the net fair value discount on acquired loans had a two basis-point effect on the average yield on loans for the year ended September 30, 2025 and a minor effect for the year ended September 30, 2024. The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, and has decreased over time as the balance of the net discount declines. The remaining net discount on acquired loans was $51,000 at September 30, 2025. During the year ended September 30, 2025, a total of $520,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $376,000 for the year ended September 30, 2024.
Interest income on investment securities decreased by $932,000, or 10.2%, to $8.20 million for the year ended September 30, 2025 from $9.13 million for the year ended September 30, 2024, due to a $49.21 million decrease in the average balance of investment securities, partially offset by a 29 basis point increase in the average yield on investment securities. The decline in average balances reflected portfolio maturities and scheduled amortization, while the increase in yield resulted from reinvesting maturing or liquidated lower-yielding securities into higher-yielding securities, as interest rates remain relatively high compared with recent years.
Interest income on interest-bearing deposits in banks and CDs increased by $315,000, or 4.0%, to $8.22 million for the year ended September 30, 2025 from $7.91 million for the year ended September 30, 2024, due to a $35.38 million increase in the average balance of interest-bearing deposits in banks and CDs, and was partially offset by an 87 basis point decrease in the average yield resulting from decreased market interest rates.
Total interest expense increased by $1.42 million, or 4.6%, to $32.08 million for the year ended September 30, 2025 from $30.66 million for the year ended September 30, 2024. The increase was primarily due to higher average balances of certificates of deposit and money market accounts, which increased $59.41 million and $22.70 million, respectively. These increases more than offset declines in NOW and savings account balances, which decreased $20.61 million and $7.07 million, respectively. Interest expense on borrowings decreased, $194,000 due to lower average borrowings. The average cost of interest-bearing liabilities rose by one basis point, to 2.53%, reflecting the combined effect of higher-cost certificates of deposit and lower-cost borrowings.
As a result of these changes, the net interest margin increased 22 basis points to 3.76% for the year ended September 30, 2025 from 3.54% for the year ended September 30, 2024.
Provision for Credit Losses: A $934,000 provision for credit losses was recorded for the year ended September 30, 2025 consisting of an $853,000 provision for credit losses on loans, primarily due to an increase in loans receivable, a $24,000 recapture of credit losses on investment securities, primarily due to lower balances resulting from maturities and principal payments and a $105,000 provision for credit losses on unfunded commitments, primarily due to an increase in the balance of unfunded loan commitments. A $1.15 million provision for credit losses was recorded for the year ended September 30, 2024 consisting of a $1.25 million provision for credit losses on loan, primarily due to an increase in loans receivable, a $32,000 recapture of credit losses on investment securities, primarily due to lower balances resulting from maturities and principal payments and a $71,000 recapture of credit losses on unfunded commitments,primarily due to a decrease in the balance of unfunded loan commitments.
During the year ended September 30, 2025, several credit metrics, including delinquent and substandard loans, showed increases compared with the prior year, but overall credit quality remains sound. Net charge-offs increased to $240,000 for the year ended September 30, 2025 compared to $54,000 for the year ended September 30, 2024, although net charge-offs (recoveries) to average outstanding loans remained low at 0.0% for both periods. Delinquent loans (loans 30 or more days past due) increased by $1.18 million, or 26.3%, to $5.66 million at September 30, 2025 from $4.48 million at September 30, 2024. Loans classified as substandard increased by $24.37 million, or 288.9%, to $32.81 million at September 30, 2025 from $8.44 million at September 30, 2024, while loans classified as doubtful totaled $202,000 at both September 30, 2025 and 2024. Loans designated as special mention totaled $5.57 million at September 30, 2025 compared to $4.40 million at September 30, 2023. Non-accrual loans increased by $522,000, or 13.4%, to $4.41 million at September 30, 2025 from $3.89 million at September 30, 2024.
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 recession or slowed economic growth, among other factors, could 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. 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 $51,000 at September 30, 2025. This discount will continue to accrete into income as these loans continue to pay down.
For additional information, see "Item 1. Business - Lending Activities -- Allowance for Credit Losses" and "Note 4 - Loans Receivable and Allowance for Credit Losses" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Non-interest Income: Total non-interest income increased $1.22 million, or 10.9%, to $12.35 million for the year ended September 30, 2025 from $11.14 million for the year ended September 30, 2024. The increase was primarily due to a $1.06 million increase in BOLI net earnings (largely the result of death benefits received in excess of cash surrender value), and by a $189,000 increase in gain on sales of loans, net and smaller increases in other categories. These increases were partially offset by a $147,000 decrease in service charges on deposits, a $91,000 decrease in ATM and debit card interchange transaction fees and smaller decreases in other categories.
Non-interest Expense: Total non-interest expense increased by $1.64 million, or 3.8%, to $45.39 million for the year ended September 30, 2025 from $43.75 million for the year ended September 30, 2024. The increase was primarily due to a $360,000 increase in state and local taxes, a $359,000 increase in professional fees, a $192,000 increase in salaries and employee benefits, a $114,000 increase in premises and equipment, a $105,000 increase in technology and communications and smaller increases in several other expense categories. These increases were partially offset by a $193,000 decrease in deposit operations, a $105,000 decrease in ATM and debit card processing and smaller decreases in several other categories. The increase in state and local taxes was primarily due to increased taxable income. The increase in professional fees was primarily due to an increase in audit and consulting fees. The increase in salaries and employee benefits was primarily due to annual salary adjustments. The decrease in deposit operations and ATM and debit card processing was primarily due to reduced customer-related fraud.
The efficiency ratio for the year ended September 30, 2025 improved to 54.98% compared to 58.09% for the year ended September 30, 2024 reflecting the combined impact of higher net interest income and non-interest income relative to total operating expenses.
Provision for Income Taxes: The provision for income taxes increased by $947,000, or 15.5% to $7.07 million for the year ended September 30, 2025 from $6.12 million for the year ended September 30, 2024. The increase was primarily due to higher pre-tax income. The Company's effective income tax rate was 19.5% for the year ended September 30, 2025 compared to 20.1% for the year ended September 30, 2024. The decrease in the effective tax rate was primarily due to a higher percentage of non-taxable income. For additional information on income taxes, see "Note 13 - Income Taxes" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Comparison of Results of Operations for the Years Ended September 30, 2024 and 2023
See Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2024 previously filed with the SEC.
Average Balances, Interest and Average Yields/Cost
The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios.
The following table sets 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. 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.
Year Ended September 30,
Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)(2)
Investment securities (2)
Dividends from mutual funds, FHLB stock and other investments
Interest-bearing deposits in banks and CDs
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
NOW checking accounts
Money market accounts
Savings accounts
Certificates of deposit accounts
Brokered deposits
Short-term borrowings
Long-term borrowings (3)
Total interest-bearing liabilities
Non-interest-bearing deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Net interest income
Interest rate spread
Net interest margin (4)
Ratio of average interest-earning assets to average interest-bearing liabilities
(1) Does not include interest on loans on non-accrual status. Includes loans held for sale and interest earned on loans held for sale. Amortized net deferred loan fees, late fees, extension fees and prepayment penalties (year ended September 30, 2025 - $1,640; year ended September 30, 2024 - $1,430 and year ended September 30, 2023 - $1,370) are included with interest and dividends. Accretion of the fair value discount on loans for the years ended September 30, 2025, 2024 and 2023 of $104, $37 and $75 respectively, is included with interest and dividends.
(2) Average balances include loans and investment securities on non-accrual status.
(3) Includes FHLB borrowings with original maturities of one year or more.
(4) Net interest income divided by total average interest-earning assets.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income on 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 both rate and volume have been allocated to rate and volume variances based on the absolute values of each.
Year Ended September 30,
2025 Compared to Year
Ended September 30, 2024
Increase (Decrease)
Due to
Year Ended September 30,
2024 Compared to Year
Ended September 30, 2023
Increase (Decrease)
Due to
Rate
Volume
Net
Change
Rate
Volume
Net
Change
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)
Investment securities
Dividends from mutual funds, FHLB stock and other investments
Interest-bearing deposits in banks and CDs
Total net change in income on interest-earning assets
Interest-bearing liabilities:
Savings accounts
Money market accounts
NOW checking accounts
Certificates of deposit accounts
Short-term borrowings
Long-term borrowings
Total net change in expense on interest-bearing liabilities
Net change in net interest income
(1) Excludes interest on loans on non-accrual status. Includes loans held for sale and interest earned on loans held for sale.
Liquidity and Capital Resources
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 FHLB borrowings (if needed). 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 September 30, 2025, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 16.6%. At September 30, 2025, the Bank maintained an unused credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which $20.00 million of the $639.92 million available for borrowings with the FHLB was outstanding at September 30, 2025. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral. At September 30, 2025, the Bank had no outstanding balance on the FRB borrowing line, under which $70.57 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At September 30, 2025, the Bank did not have an outstanding balance on this
borrowing line. Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit 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 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 years ended September 30, 2025, 2024 and 2023, the Bank originated $310.90 million, $251.44 million and $361.79 million of loans, respectively. At September 30, 2025, the Bank had loan commitments, consisting of undisbursed lines of credit and commitments to extend credit, totaling $158.26 million and undisbursed construction loans in process totaling $88.29 million. Investment securities purchased during the years ended September 30, 2025, 2024 and 2023 totaled $52.89 million, $44.95 million and $32.60 million, respectively.
The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the years ended September 30, 2025, 2024 and 2023, the Bank sold $22.60 million, $14.75 million and $11.54 million, respectively, in loans and loan participation interests. During the years ended September 30, 2025, 2024 and 2023, the Bank received $227.11 million, $142.78 million and $177.31 million, respectively, in loan principal repayments.
The Bank’s liquidity has been impacted by changes in deposit levels. During the years ended September 30, 2025 and 2024, deposits increased by $68.97 million and $86.73 million, respectively. During the year ended September 30, 2023, deposits decreased by $71.24 million. Our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale increased to $328.89 million at September 30, 2025 from $247.19 million at September 30, 2024. The increase was primarily a result of increased deposits which were offset by a decrease in total investment securities, due to maturities and prepayments outpacing purchases. 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 projects scheduled for capital investments in premises and equipment during the fiscal year ending September 30, 2026 that would materially impact liquidity.
For the fiscal year ending September 30, 2026, the Bank projects that fixed commitments will include $377,000 of operating lease payments. FHLB borrowings of $20.0 million mature during the fiscal year 2026. In addition, at September 30, 2025, there were other future obligations and accrued expenses of $10.45 million. For additional information, see "Note 11 - FHLB Borrowings and Other Borrowings" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
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 its operating expenses, Timberland Bancorp is responsible for paying 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. At September 30, 2025, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.16 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 $0.28 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 2026 at the rate of $0.28 per share, the average total dividend paid each quarter would be approximately $2.21 million based on the number of current outstanding shares at September 30, 2025.
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 22, 2025, the Company announced the adoption of a stock repurchase program authorizing the repurchase of up to 393,842 shares of Company common stock, of which 337,280 shares remained available for future purchases as of September 30, 2025. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares. For additional information on the Company’s stock repurchases, see “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Part II of this report.
Bank holding companies and federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. At September 30, 2025, Timberland Bancorp and the Bank were in compliance with all applicable capital requirements. For additional details, see "Note 17 - Regulatory Matters" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report and “Item 1. Business - Regulation of the Bank - Capital Requirements".
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their impact on the Company, see "Note 1-Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
