Timberland Bancorp Inc.
05/07/2026 | Press release | Distributed by Public on 05/07/2026 11:22
Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
As used in this Form 10-Q, the terms "we," "us," "our" and the "Company" refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. References to the "Bank" in this Form 10-Q, refer to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank's wholly-owned subsidiary, Timberland Service Corporation.
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q. The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2026.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by our forward-looking statements, including, but not limited to:
•adverse economic conditions in our local markets or other markets where we have lending relationships;
•changes in employment levels, labor shortages inflation, a recession or slowed economic growth;
•changes in interest rate levels and the duration volatility, and the timing and pace of such changes, including actions by the Board of Governors of the Federal Reserve System ("Federal Reserve"), which could materially affect our net interest margin, funding costs, asset values, access to capital and liquidity;
•the impact of inflation, including and related monetary and fiscal policy responses thereto, and the impact their effect on consumer and business behavior;
•geopolitical developments and international conflicts, including but not limited to tensions or instability in Eastern Europe, the Middle East, and Asia, or the imposition of new or increased tariffs and trade restrictions, could disrupt financial markets, global supply chains, commodity prices, or economic activity in specific industry sectors;
•the effects of a Federal government shutdown, a debt ceiling standoff, or other fiscal policy uncertainty;
•credit risks associated with lending activities, including loan delinquencies, write-offs, changes in our allowance for credit losses ("ACL"), and provision for credit losses;
•fluctuations in the demand for loans, the number of unsold homes, land and other properties, and real estate values in our market areas;
•secondary market conditions for loans and our ability to sell loans in the secondary market;
•results of examinations of us by regulatory authorities, including the possibility that such regulatory authorities may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our ACL, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;
•the impact of bank failures or adverse developments at other banks and related negative publicity about the banking industry in general on investor and depositor sentiment;
•legislative or regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules;
•our ability to attract and retain deposits;
•our ability to control operating costs and expenses;
•the ability to adapt to rapid technological changes, including advancements related to artificial intelligence, digital banking platforms, and cybersecurity;
•the use of estimates in determining the fair value of assets, which may prove inaccurate;
•staffing fluctuations in response to changes in product demand or corporate implementation strategies;
•vulnerabilities in information systems or third-party service providers, including disruptions, breaches, or attacks;
•our ability to retain key members of our senior management team;
•costs and effects of litigation, including settlements and judgments;
•our ability to implement our business strategies, including expectations regarding key growth initiatives and strategic priorities;
•increased competitive pressures among financial services companies;
•changes in consumer spending, borrowing and savings habits;
•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
•our ability to pay dividends on our common stock;
•quality and composition of our securities portfolio and the impact of adverse changes in the securities markets;
•inability of key third-party providers to perform their obligations;
•changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board ("FASB");
•environmental, social and governance matters;
•effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, domestic political unrest, and other external events;
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and
•other risks described elsewhere in this Form 10-Q and our other reports filed with or furnished to the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2025 (the "2025 Form 10-K").
Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this quarterly report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except as may be required by law. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2026 and beyond to differ materially from those expressed or implied in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's consolidated financial condition and results of operations as well as its stock price performance.
Overview
Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 offices (including its main office in Hoquiam). At March 31, 2026, the Company had total assets of $2.05 billion, net loans receivable of $1.45 billion, total deposits of $1.74 billion and total shareholders' equity of $271.09 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the unaudited consolidated financial statements and related data, relates primarily to the Bank's operations.
The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans.
The profitability of the Company's operations depends primarily on its net interest income after provision for (recapture of) credit losses. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities.
Our net interest income, net interest margin, ("NIM"), and net interest spread are primarily influenced by changes in market interest rates, the shape of the yield curve, and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities. These components of net interest income are also affected by the volume and composition of our interest-earning assets, interest-bearing and non-interest-bearing liabilities, and shareholders' equity. During the six months ended March 31, 2026, interest rate trends were influenced by monetary policy actions taken by the Federal Open Market Committee ("FOMC") of the Federal Reserve. In the second half of calendar year 2025, the FOMC reduced the target range for the federal funds rate three times, most recently to a range of 3.50% to 3.75% in December 2025. Despite the decline in market rates, net interest income improved for both the three and six months ended March 31, 2026 compared to the prior year periods, driven by growth in interest-earning assets and a decline in funding costs that outpaced the reduction in asset yields. Our NIM improved modestly for the three months ended March 31, 2026 and more meaningfully for the six months then ended, reflecting the benefit of lower deposit and borrowing costs and continued growth in the average balance of our loan portfolio.
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 management has determined is adequate to cover probable expected credit losses in the loan portfolio. As the loan portfolio increases, or due to an increase in probable expected losses inherent in the loan portfolio, the ACL may
increase, resulting in a decrease to net interest income after the provision. Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to the ACL on loans due to loan growth or an increase in the probable expected credit losses. The Company recorded a provision for credit losses on loans of $523,000 and $539,000 for the three and six months ended March 31, 2026 compared to a provision for credit losses on loans of $237,000 and $289,000 for the three and six months ended March 31, 2025.
Net income is also impacted by levels of non-interest income and non-interest expense. For the three and six months ended March 31, 2026, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, BOLI net earnings, servicing income on loans sold, escrow fees and other operating income. Non-interest income may also be affected by net recoveries on investment securities and the reversal of previously recognized OTTI losses, if applicable. Additionally, it is reduced by valuation allowances on loan servicing rights and increased by recoveries of such allowances, when recognized. Non-interest expense for the same periods primarily included salaries and employee benefits, premises and equipment costs, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure-related expenses, technology and communications expenses, deposit operation expenses, amortization of CDI, and other general operating expenses. In certain periods, non-interest expense may be offset by gains on the sale of premises and equipment or OREO. Both non-interest income and non-interest expense are influenced by the Company's overall growth and the expansion of its loan and deposit account base.
Results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Critical Accounting Estimates
Management's discussion and analysis of the Company's financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
The Company's critical accounting estimates are described in the Company's 2025 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates." That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company's critical accounting policies and estimates as previously disclosed in the Company's 2025 Form 10-K.
Comparison of Financial Condition at March 31, 2026 and September 30, 2025
General: Total assets increased by $33.61 million, or 1.7%, to $2.05 billion at March 31, 2026 from $2.01 billion at September 30, 2025. The increase was primarily due to increases in cash and cash equivalents, funded mainly by increased deposits. This increase was partially offset by decreases in net loans receivable and investment securities.
Net loans receivable decreased by $12.71 million, or 0.9%, to $1.45 billion at March 31, 2026 from $1.46 billion at September 30, 2025, primarily due to decreases in custom and owner/builder construction, land development, commercial construction and one- to four-family loan categories. These decreases were partially offset by increases in multi-family construction, multi-family, and speculative one-to four-family construction loan categories.
Total deposits increased by $26.58 million, or 1.5%, to $1.74 billion at March 31, 2026 from $1.72 billion at September 30, 2025, primarily due to increases in NOW checking and money market account balances. These increases were partially offset by decreases in non-interest bearing deposit and savings account balances.
Shareholders' equity increased by $8.48 million, or 3.2%, to $271.09 million at March 31, 2026 from $262.61 million at September 30, 2025. The increase was primarily due to net income earned during the current period, partially offset by the payment of dividends to common shareholders, and repurchases of common stock during the six months ended March 31, 2026
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 $50.00 million, or 19.9%, to $300.64 million at March 31, 2026 from $250.64 million at September 30, 2025. The increase was due to a $51.24 million increase in cash and cash equivalents, resulting primarily from maturities, prepayments and scheduled amortizations of investment securities, loan payoffs and net deposit inflows during the period. The overall increase was partially offset by a $1.24 million decrease in CDs held for investment.
Investment Securities: Investment securities (including investments in equity securities) decreased by $5.91 million, or 2.7%, to $210.06 million at March 31, 2026 from $215.97 million at September 30, 2025. This decrease was primarily due to maturities, prepayments and scheduled amortizations which was partially offset by the purchase of $24.95 million of new securities. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
FHLB Stock: FHLB stock increased to $2.10 million at March 31, 2026 from $2.05 million at September 30, 2025. The increase was due to FHLB's required annual share assessment, which is based on total assets.
Other Investments: Other investments, consisting solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, remained unchanged at $3.00 million at both March 31, 2026 and September 30, 2025. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.
Loans: Net loans receivable decreased by $12.71 million, or 0.9%, to $1.45 billion at March 31, 2026 from $1.46 billion at September 30, 2025. The decrease was primarily due to a $26.27 million decrease in custom and owner/builder construction, a $12.41 million decrease in land development construction, a $8.83 million decrease in commercial construction, $6.19 million decrease in one- to four-family loans and smaller decreases in several other loan categories. These decreases were partially offset by a $34.59 million increase in multi-family construction, a $6.34 million increase in multi-family, a $5.10 million increase in speculative one-to four-family construction and smaller increases in other loan categories.
Loan originations increased by $15.52 million, or 12.1%, to $144.18 million for the six months ended March 31, 2026 from $128.66 million for the six months ended March 31, 2025. The increase was primarily due to increases in originations of construction, multi-family, commercial business and one- to four-family loans. These increases were partially offset by decreases in commercial real estate and land loan originations.
The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four-family loans increased by $7.54 million, or 100.7%, to $15.02 million for the six months ended March 31, 2026 from $7.48 million for the six months ended March 31, 2025, primarily due to an increase in one- to four-family construction loans refinancing to permanent loans and being sold into the secondary market.
For additional information on loans, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
Premises and Equipment: Premises and equipment increased by $241,000, or 1.1%, to $21.93 million at March 31, 2026 from $21.68 million at September 30, 2025. The increase reflects capitalized additions related to the University Place branch which opened in January 2026 and facility improvements and equipment purchases for other locations during the period, which were offset by scheduled depreciation expense.
OREO (Other Real Estate Owned): At March 31, 2026 and September 30, 2025, total OREO and other repossessed assets consisted of one commercial real estate property with a value of $221,000 and one land parcel with no recorded value.
BOLI (Bank Owned Life Insurance): BOLI increased by $313,000, or 1.4%, to $22.14 million at March 31, 2026 from $21.83 million at September 30, 2025. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.
Goodwill and CDI: The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2026 and September 30, 2025. CDI decreased by $68,000, or 25.1%, to $203,000 at March 31, 2026 from $271,000 at September 30, 2025 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
Loan Servicing Rights, Net: Loan servicing rights, net decreased by $174,000, or 21.4%, to $641,000 at March 31, 2026 from $815,000 at September 30, 2025 primarily due to the amortization of servicing rights, which exceeded additions from new loan sale activity during the period. The principal amount of loans serviced for Freddie Mac and the U.S. Small Business Administration decreased by $3.87 million to $352.29 million at March 31, 2026 from $356.16 million at September 30, 2025.
Other Assets: Other assets increased $1.52 million, or 24.9% to $7.64 million at March 31, 2026 from $6.11 million at September 30, 2025. This was mainly due to an $877,000 increase in total prepaid expenses and a $221,000 increase in the debit card processing prefund amount, as well as increases in other miscellaneous asset balances.
Deposits: Deposits increased by $26.58 million, or 1.5%, to $1.74 billion at March 31, 2026 from $1.72 billion at September 30, 2025. The increase was primarily due to a $29.66 million increase in money market account balances and a $24.79 million increase in NOW checking account balances. These increases were partially offset by a $22.71 million decrease in non-interest bearing demand account balances, a $3.87 million decrease in savings account balances and a $1.29 million decrease in certificate of deposit account balances. The change in deposit balances and mix reflects continued competitive pricing pressures in the current interest rate environment.
At March 31, 2026, the loan-to-deposit ratio was approximately 83.30%, compared to 85.26% at September 30, 2025, reflecting continued disciplined loan growth largely funded by core deposit activity. Management continues to monitor deposit pricing and mix in the context of liquidity management and efforts to support net interest income and profitability.
Deposits consisted of the following at March 31, 2026 and September 30, 2025 (dollars in thousands):
| March 31, 2026 | September 30, 2025 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| Non-interest-bearing demand | $ | 407,980 | 23.4 | % | $ | 430,685 | 25.1 | % | |||||||||||||||
| NOW checking | 370,385 | 21.3 | 345,599 | 20.1 | |||||||||||||||||||
| Savings | 197,805 | 11.3 | 201,678 | 11.7 | |||||||||||||||||||
| Money market | 325,811 | 18.7 | 296,152 | 17.3 | |||||||||||||||||||
| Certificates of deposit under $250 | 257,449 | 14.8 | 256,597 | 14.9 | |||||||||||||||||||
| Certificates of deposit $250 and over | 141,843 | 8.1 | 142,813 | 8.3 | |||||||||||||||||||
| Certificates of deposit - brokered | 41,937 | 2.4 | 43,111 | 2.6 | |||||||||||||||||||
| Total | $ | 1,743,210 | 100.0 | % | $ | 1,716,635 | 100.0 | % | |||||||||||||||
FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings remained unchanged at $20.00 million at both March 31, 2026 and September 30, 2025. The borrowings consist of three borrowings: two totaling $15.00 million with scheduled maturities in May 2026, both bearing interest at 3.95%, and one $5.00 million borrowing maturing in August 2026 with an interest rate of 4.03%.
Shareholders' Equity: Total shareholders' equity increased by $8.48 million, or 3.2%, to $271.09 million at March 31, 2026 from $262.61 million at September 30, 2025. The increase was primarily due to net income of $15.35 million. This increase was partially offset by dividend payments to common shareholders of $4.50 million and the repurchase of 109,303 shares of the Company's common stock for $4.11 million, net of tax.
Asset Quality and Commercial Real Estate Portfolio Breakdown:
Non-performing assets to total assets was 0.47% and 0.23% at March 31, 2026 and September 30, 2025, respectively. Non-performing assets increased by $4.99 million, or 107.1%, to $9.66 million at March 31, 2026 from $4.66 million at September 30, 2025. The increase was primarily due to a $5.00 million increase in non-accrual loans. The increase in non-accrual loans was primarily driven by a $4.70 million increase in the commercial real estate portfolio, reflecting the addition of a hotel/motel relationship, along with a $397,000 increase in commercial business and a $153,000 increase in one- to four- family loans. These increases were partially offset by a $250,000 decrease in the home equity and second mortgage portfolio.
Substandard loans decreased $23.27 million to $9.54 million at March 31, 2026 from $32.81 million at September 30, 2025. As of March 31, 2026, substandard loans are 0.66% of total loans receivable. The decrease is primarily a result of the largest substandard loan that was secured by a land development project paying off during the period and the second largest substandard loan that was secured by an apartment property being upgraded.
The following table sets forth information with respect to the Company's non-performing assets at March 31, 2026 and September 30, 2025 (dollars in thousands):
|
March 31, 2026 |
September 30, 2025 |
||||||||||
| Loans accounted for on a non-accrual basis: | |||||||||||
| Mortgage loans: | |||||||||||
| One- to four-family (1) | $ | 1,934 | $ | 1,781 | |||||||
| Commercial real estate | 4,859 | 159 | |||||||||
| Construction - custom and owner/builder | 553 | 553 | |||||||||
| Consumer loans: | |||||||||||
| Home equity and second mortgage | 352 | 602 | |||||||||
| Other | 20 | 22 | |||||||||
| Commercial business loans | 1,687 | 1,290 | |||||||||
| Total loans accounted for on a non-accrual basis | 9,405 | 4,407 | |||||||||
| Accruing loans which are contractually past due 90 days or more | - | - | |||||||||
| Total of non-accrual and 90 days or more past due loans | 9,405 | 4,407 | |||||||||
| Non-accrual investment securities | 30 | 35 | |||||||||
| OREO and other repossessed assets, net | 221 | 221 | |||||||||
| Total non-performing assets | $ | 9,656 | $ | 4,663 | |||||||
| Non-accrual and 90 days or more past due loans as a percentage of loans receivable | 0.64 | % | 0.30 | % | |||||||
| Non-accrual and 90 days or more past due loans as a percentage of total assets | 0.46 | % | 0.22 | % | |||||||
| Non-performing assets as a percentage of total assets | 0.47 | % | 0.23 | % | |||||||
| Loans receivable (2) | $ | 1,469,525 | $ | 1,481,681 | |||||||
| Total assets | $ | 2,046,386 | $ | 2,012,779 | |||||||
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(1) At both March 31, 2026 and September 30, 2025 there was one one- to four-family property in the process of foreclosure.
(2) Does not include loans held for sale. Loan balances are before any reduction of the ACL.
The following tables provide a breakdown of commercial real estate ("CRE") loans by collateral types as of March 31, 2026 and September 30, 2025:
| CRE Loan Portfolio Breakdown by Collateral at March 31, 2026 | ||||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Collateral Type | Balance | Percent of CRE Portfolio | Percent of Total Loan Portfolio | Average Balance per Loan | Non-Accrual | |||||||||||||||||||||||||||
| Industrial warehouse | $ | 131,278 | 21.4 | % | 8.4 | % | $ | 1,353 | $ | - | ||||||||||||||||||||||
| Medical/dental offices | 80,060 | 13.1 | 5.1 | 1,213 | 237 | |||||||||||||||||||||||||||
| Office buildings | 69,655 | 11.4 | 4.5 | 819 | 294 | |||||||||||||||||||||||||||
| Other retail buildings | 55,702 | 9.1 | 3.6 | 619 | - | |||||||||||||||||||||||||||
| Mini-storage | 37,840 | 6.2 | 2.4 | 1,514 | - | |||||||||||||||||||||||||||
| Hotel/motel | 32,405 | 5.3 | 2.1 | 2,315 | 4,328 | |||||||||||||||||||||||||||
| Restaurants | 28,018 | 4.6 | 1.8 | 584 | - | |||||||||||||||||||||||||||
| Gas stations/convenience stores | 26,182 | 4.3 | 1.7 | 1,007 | - | |||||||||||||||||||||||||||
| Churches | 13,842 | 2.3 | 0.9 | 923 | - | |||||||||||||||||||||||||||
| Nursing homes | 13,304 | 2.2 | 0.9 | 2,217 | - | |||||||||||||||||||||||||||
| Shopping centers | 10,290 | 1.7 | 0.7 | 1,715 | - | |||||||||||||||||||||||||||
| Mobile home parks | 9,280 | 1.5 | 0.6 | 422 | - | |||||||||||||||||||||||||||
| Other | 103,261 | 16.9 | 6.6 | 776 | - | |||||||||||||||||||||||||||
| Total CRE | $ | 611,117 | 100.0 | % | 39.3 | % | $ | 965 | $ | 4,859 | ||||||||||||||||||||||
| CRE Loan Portfolio Breakdown by Collateral at September 30, 2025 | ||||||||||||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Collateral Type | Balance | Percent of CRE Portfolio | Percent of Total Loan Portfolio | Average Balance per Loan | Non-Accrual | |||||||||||||||||||||||||||
| Industrial warehouse | $ | 129,815 | 21.3 | % | 8.2 | % | $ | 1,311 | $ | 159 | ||||||||||||||||||||||
| Medical/dental offices | 81,831 | 13.4 | 5.2 | 1,240 | - | |||||||||||||||||||||||||||
| Office buildings | 67,840 | 11.1 | 4.3 | 817 | - | |||||||||||||||||||||||||||
| Other retail buildings | 54,497 | 8.9 | 3.5 | 599 | - | |||||||||||||||||||||||||||
| Mini-storage | 38,291 | 6.3 | 2.4 | 1,532 | - | |||||||||||||||||||||||||||
| Hotel/motel | 31,345 | 5.1 | 2.0 | 2,612 | - | |||||||||||||||||||||||||||
| Restaurants | 28,703 | 4.7 | 1.8 | 586 | - | |||||||||||||||||||||||||||
| Gas stations/convenience stores | 25,597 | 4.2 | 1.6 | 1,024 | - | |||||||||||||||||||||||||||
| Churches | 14,410 | 2.4 | 0.9 | 901 | - | |||||||||||||||||||||||||||
| Nursing homes | 13,456 | 2.2 | 0.9 | 2,243 | - | |||||||||||||||||||||||||||
| Shopping centers | 10,436 | 1.7 | 0.7 | 1,739 | - | |||||||||||||||||||||||||||
| Mobile home parks | 9,174 | 1.5 | 0.6 | 417 | - | |||||||||||||||||||||||||||
| Other | 105,297 | 17.2 | 6.7 | 774 | - | |||||||||||||||||||||||||||
| Total CRE | $ | 610,692 | 100.0 | % | 38.8 | % | $ | 960 | $ | 159 | ||||||||||||||||||||||
Comparison of Operating Results for the Three and Six Months Ended March 31, 2026 and 2025
Net income increased by $376,000, or 5.6%, to $7.13 million for the quarter ended March 31, 2026 from $6.76 million for the quarter ended March 31, 2025. Net income per diluted common share increased by $0.05, or 5.9%, to $0.90 for the quarter ended March 31, 2026 from $0.85 for the quarter ended March 31, 2025. The increases in net income and diluted earnings per share for the three months ended March 31, 2026, were primarily due to a $1.03 million increase in net interest income and a $120,000 increase in non-interest income. These increases were partially offset by a $465,000 increase in non-interest expense and a $277,000 increase in provision for credit losses.
Net income increased by $1.73 million, or 12.7%, to $15.35 million for the six months ended March 31, 2026 from $13.62 million for the six months ended March 31, 2025. Net earnings per diluted common share increased by $0.23, or 13.5%, to $1.94 for the six months ended March 31, 2026 from $1.71 for the six months ended March 31, 2025. The increases in net income and net earnings per diluted common share were due to a $3.01 million increase in net interest income and a $187,000 increase in non-interest income. These increases were partially offset by a $830,000 increase in non-interest expense and a $216,000 increase in provision for credit losses.
Net Interest Income: Net interest income increased by $1.03 million, or 6.0%, to $18.24 million for the quarter ended March 31, 2026 from $17.21 million for the quarter ended March 31, 2025. This increase was primarily due to a $101.78 million increase in average interest-earning assets and a 12 basis point decrease in the average cost of interest bearing liabilities to 2.35% for the quarter ended March 31, 2026 from 2.47% for the quarter ended March 31, 2025. These benefits were partially offset by a six basis point decrease in the weighted average yield on interest-earning assets to 5.42% for the quarter ended March 31, 2026 from 5.48% for the quarter ended March 31, 2025, and a $78.04 million increase in average interest-bearing liabilities.
Total interest and dividend income increased by $1.09 million, or 4.4%, to $25.96 million for the quarter ended March 31, 2026 from $24.87 million for the quarter ended March 31, 2025. The increase was primarily due to a $38.10 million increase in average loan balances and a nine basis point improvement in loan yields, which together increased loan interset income by $897,000. The improvement on loan yields reflects continued asset repricing, partially offset by a $19.44 million decrease in the average balance of investment securities. Prepayment penalties, non-accrual interest and late fees totaled $38,000 for the quarter ended March 31, 2026 compared to $201,000 in the prior year quarter which reduced the loan portfolio yield by one basis point. Interest income on deposits in banks and CD's increased $450,000 due to an $83.13 million increase in average balances, partially offset by a 73 basis point decline in yields reflecting lower short-term interest rates. These increases were partially offset by a $252,000 decrease in investment securities income driven by both a $19.48 million decrease in average balance and a 15 basis point decline in yields.
Total interest expense increased by $59,000, or 0.8%, to $7.71 million for the quarter ended March 31, 2026 from $7.65 million for the quarter ended March 31, 2025. The increase was minimal despite a $78.04 million increase in average interest-bearing liabilities, as the average cost of those liabilities declined 12 basis points to 2.35% for the quarter ended March 31, 2026 from 2.47% for the quarter ended March 31, 2025. The lower funding costs reflect repricing of money market accounts and retail certificates of deposit in response to changes in market interest rates, partially offset by higher rates on NOW checking accounts. Average balances of retail CDs, NOW checking accounts and money market accounts increased, while brokered CD and savings account balances declined, reducing higher-cost wholesale funding and reflecting a continued shift toward core deposit funding.
As a result of changes above, the NIM increased two basis points to 3.81% for the quarter ended March 31, 2026 from 3.79% for the quarter ended March 31, 2025. The improvement reflects the impact of Federal Reserve rate reductions, which drove a 12 basis point decline in funding costs, more than offsetting a six basis point decrease in asset yields as the effect of lower market rates outpaced the benefit from the increase in average loan balances and repricing of adjustable-rate loans
Net interest income increased by $3.01 million, or 8.8%, to $37.19 million for the six months ended March 31, 2026 from $34.18 million for the six months ended March 31, 2025. This increase was primarily due to a $101.58 million increase in average interest-earning assets and a three basis point increase in the weighted average yield on interest-earning assets to 5.47% for the six months ended March 31, 2026 from 5.44% for the six months ended March 31, 2025, primarily due to the increase in average loan balances and a 19 basis point increase in loan yields. These increases were partially offset by a $76.75 million increase in average interest-bearing liabilities, while a 15 basis point decrease in the average cost of interest-bearing liabilities to 2.40% for the six months ended March 31, 2026 from 2.55% for the six months ended March 31, 2025 largely offset the impact of the increased liability balances.
Total interest and dividend income increased $3.03 million, or 6.0%, to $53.15 million for the six months ended March 31, 2026 from $50.12 million for the six months ended March 31, 2025. The increase was primarily due to a $39.28 million increase in average loan balances and a 19 basis point improvement in loan yields to 6.04% for the six months ended March 31, 2026, which together increased loan interest income by $2.54 million. The improvement in loan yields reflects continued asset repricing of adjustable-rate loans, supported by $338,000 in prepayment penalties, non-accrual interest and late fees compared to $316,000 in the prior year period. Interest income on deposits in banks and CDs increased $1.03 million due to an $86.40 million increase in average balances, partially offset by a 75 basis point decline in yields to 3.85% for the six months ended March 31, 2026 from 4.60% for the six months ended March 31, 2025, reflecting lower short-term interest rates. These increases were partially offset by a $528,000 decrease in interest income earned on investment securities primarily due to a $24.1 million decrease in average balances.
Total interest expense increased by $16,000, or 0.1%, to $15.96 million for the six months ended March 31, 2026 from $15.94 million for the six months ended March 31, 2025. The increase was limited despite a $76.75 million increase in average interest-bearing liabilities, as the average cost of those liabilities declined 15 basis points to 2.40% for the six months ended March 31, 2026 from 2.55% for the six months ended March 31, 2025. The lower funding costs reflect repricing of money market accounts and retail certificates of deposit in response to Federal Reserve rate reductions during the period, partially offset by higher rates on NOW checking accounts. Average balances of retail CDs, NOW checking accounts and money market accounts increased, while brokered CD and savings account balances declined, reducing higher-cost wholesale funding and reflecting a continued shift toward core deposit funding.
Net interest margin expanded 12 basis points to 3.83% for the six months ended March 31, 2026 from 3.71% for the six months ended March 31, 2025. The improvement reflects a 15 basis point decline in funding costs driven by reductions in money market, certificate of deposit and brokered CD rates following three reductions in the target federal funds rate by the FOMC in the second half of calendar year 2025, to a range of 3.50% to 3.75% in December 2025. These benefits exceeded the three basis point increase in asset yields, which was supported by an increase in average loan balances and the upward repricing of adjustable-rate loans.
Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands).
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2026 | 2025 | ||||||||||||||||||||||||||||||||||
|
Average Balance |
Interest and Dividends |
Yield/ Cost |
Average Balance |
Interest and Dividends |
Yield/ Cost |
||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Loans receivable (1)(2) | $ | 1,474,095 | $ | 21,793 | 5.99 | % | $ | 1,435,999 | $ | 20,896 | 5.90 | % | |||||||||||||||||||||||
| Investment securities (2) | 207,170 | 1,751 | 3.43 | 226,649 | 2,003 | 3.58 | |||||||||||||||||||||||||||||
| Dividends from mutual funds, FHLB stock and other investments | 5,919 | 77 | 5.28 | 5,883 | 82 | 5.65 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in banks and CDs | 255,300 | 2,334 | 3.71 | 172,175 | 1,884 | 4.44 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 1,942,484 | 25,955 | 5.42 | 1,840,706 | 24,865 | 5.48 | |||||||||||||||||||||||||||||
| Non-interest-earning assets | 78,917 | 77,563 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 2,021,401 | $ | 1,918,269 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| NOW checking | $ | 364,926 | 1,376 | 1.53 | $ | 328,115 | 1,071 | 1.32 | |||||||||||||||||||||||||||
| Money market | 312,593 | 2,084 | 2.70 | 306,137 | 2,401 | 3.18 | |||||||||||||||||||||||||||||
| Savings | 197,031 | 136 | 0.28 | 206,054 | 141 | 0.28 | |||||||||||||||||||||||||||||
| Certificates of deposit | 399,665 | 3,513 | 3.56 | 343,945 | 3,241 | 3.82 | |||||||||||||||||||||||||||||
| Brokered CDs | 38,176 | 404 | 4.29 | 50,104 | 600 | 4.85 | |||||||||||||||||||||||||||||
| Short-term borrowings | 20,000 | 198 | 4.03 | - | - | - | |||||||||||||||||||||||||||||
| Long-term borrowings | - | - | - | 20,000 | 198 | 4.04 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,332,391 | 7,711 | 2.35 | 1,254,355 | 7,652 | 2.47 | |||||||||||||||||||||||||||||
| Non-interest-bearing deposits | 407,936 | 403,738 | |||||||||||||||||||||||||||||||||
| Other liabilities | 11,373 | 10,064 | |||||||||||||||||||||||||||||||||
| Total liabilities | 1,751,700 | 1,668,157 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 269,701 | 250,112 | |||||||||||||||||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||||||||||||||||
| shareholders' equity | $ | 2,021,401 | $ | 1,918,269 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 18,244 | $ | 17,213 | |||||||||||||||||||||||||||||||
| Interest rate spread | 3.07 | % | 3.01 | % | |||||||||||||||||||||||||||||||
| Net interest margin (3) | 3.81 | % | 3.79 | % | |||||||||||||||||||||||||||||||
| Ratio of average interest-earning assets to average interest- bearing liabilities | 145.79 | % | 146.75 | % | |||||||||||||||||||||||||||||||
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.
| Six Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2026 | 2025 | ||||||||||||||||||||||||||||||||||
|
Average Balance |
Interest and Dividends |
Yield/ Cost |
Average Balance |
Interest and Dividends |
Yield/ Cost |
||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Loans receivable (1)(2) | $ | 1,476,356 | $ | 44,467 | 6.04 | % | $ | 1,437,081 | $ | 41,928 | 5.85 | % | |||||||||||||||||||||||
| Investment securities (2) | 209,951 | 3,613 | 3.45 | 234,078 | 4,141 | 3.55 | |||||||||||||||||||||||||||||
| Dividends from mutual funds, FHLB stock and other investments | 5,915 | 158 | 5.39 | 5,888 | 168 | 5.48 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in banks and CDs | 255,847 | 4,912 | 3.85 | 169,444 | 3,885 | 4.60 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 1,948,069 | 53,150 | 5.47 | 1,846,491 | 50,122 | 5.44 | |||||||||||||||||||||||||||||
| Non-interest-earning assets | 79,097 | 76,535 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 2,027,166 | $ | 1,923,026 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| NOW checking | $ | 366,761 | 2,872 | 1.57 | $ | 328,287 | 2,214 | 1.35 | |||||||||||||||||||||||||||
| Money market | 308,342 | 4,279 | 2.78 | 315,381 | 5,199 | 3.31 | |||||||||||||||||||||||||||||
| Savings | 197,715 | 286 | 0.29 | 205,849 | 285 | 0.28 | |||||||||||||||||||||||||||||
| Certificates of deposit | 400,643 | 7,287 | 3.65 | 337,798 | 6,659 | 3.95 | |||||||||||||||||||||||||||||
| Brokered CDs | 38,847 | 831 | 4.29 | 48,239 | 1,181 | 4.91 | |||||||||||||||||||||||||||||
| Short-term borrowings | 20,000 | 401 | 4.03 | - | - | - | |||||||||||||||||||||||||||||
| Long-term borrowings | - | - | - | 20,000 | 402 | 4.02 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,332,308 | 15,956 | 2.40 | 1,255,554 | 15,940 | 2.55 | |||||||||||||||||||||||||||||
| Non-interest-bearing deposits | 415,309 | 409,000 | |||||||||||||||||||||||||||||||||
| Other liabilities | 12,519 | 10,107 | |||||||||||||||||||||||||||||||||
| Total liabilities | 1,760,136 | 1,674,661 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 267,030 | 248,365 | |||||||||||||||||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||||||||||||||||
| shareholders' equity | $ | 2,027,166 | $ | 1,923,026 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 37,194 | $ | 34,182 | |||||||||||||||||||||||||||||||
| Interest rate spread | 3.07 | % | 2.89 | % | |||||||||||||||||||||||||||||||
| Net interest margin (3) | 3.83 | % | 3.71 | % | |||||||||||||||||||||||||||||||
| Ratio of average interest-earning assets to average interest- bearing liabilities | 146.22 | % | 147.07 | % | |||||||||||||||||||||||||||||||
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on the net interest income of the Company. Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns). Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).
|
Three months ended March 31, 2026 compared to three months ended March 31, 2025 increase (decrease) due to |
Six months ended March 31, 2026 compared to six months ended March 31, 2025 increase (decrease) due to |
||||||||||||||||||||||||||||||||||
| Rate | Volume |
Net Change |
Rate | Volume |
Net Change |
||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Loans receivable and loans held for sale | $ | 337 | $ | 560 | $ | 897 | $ | 1,376 | $ | 1,163 | $ | 2,539 | |||||||||||||||||||||||
| Investment securities | (85) | (167) | (252) | (110) | (418) | (528) | |||||||||||||||||||||||||||||
| Dividends from mutual funds, FHLB stock and other investments | (5) | - | (5) | (4) | (6) | (10) | |||||||||||||||||||||||||||||
| Interest-bearing deposits in banks and CDs | (348) | 798 | 450 | (231) | 1,258 | 1,027 | |||||||||||||||||||||||||||||
| Total net increase (decrease) in income on interest-earning assets | (101) | 1,191 | 1,090 | 1,031 | 1,997 | 3,028 | |||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| NOW checking | 177 | 128 | 305 | 381 | 277 | 658 | |||||||||||||||||||||||||||||
| Money market | (368) | 51 | (317) | (806) | (114) | (920) | |||||||||||||||||||||||||||||
| Savings | 1 | (6) | (5) | 6 | (5) | 1 | |||||||||||||||||||||||||||||
| Certificates of deposit | (336) | 412 | 76 | (320) | 597 | 277 | |||||||||||||||||||||||||||||
| Short-term FHLB borrowings | - | 198 | 198 | - | (401) | (401) | |||||||||||||||||||||||||||||
| Long-term borrowings | - | (198) | (198) | - | 401 | 401 | |||||||||||||||||||||||||||||
| Total net increase (decrease) in expense on interest-bearing liabilities | (526) | 585 | 59 | (739) | 755 | 16 | |||||||||||||||||||||||||||||
| Net increase in net interest income | $ | 425 | $ | 606 | $ | 1,031 | $ | 1,770 | $ | 1,242 | $ | 3,012 | |||||||||||||||||||||||
Provision for Credit Losses: A $523,000 provision for credit losses was recorded for the quarter ended March 31, 2026, consisting of a $523,000 provision for credit losses on loans, a $3,000 recapture of credit losses on investment securities, and a $3,000 provision for credit losses on unfunded commitments. The provision for credit losses on loans was primarily due to a commercial real estate loan secured by a hotel in Oregon that is a purchased participation with another community bank. A $246,000 provision for credit losses was recorded for the quarter ended March 31, 2025, consisting of a $237,000 provision for credit losses on loans, a $5,000 recapture of credit losses on investment securities and an $14,000 provision for credit losses on unfunded commitments.
We recorded a $488,000 provision for credit losses for the six months ended March 31, 2026, consisting of a $539,000 provision for credit losses on loans primarily due to the hotel credit discussed above, a $5,000 recapture of credit losses on investment securities which was primarily due to maturities and principal repayments, and a $46,000 recapture of credit losses on unfunded loan commitments which was primarily due to a decrease in the amounts of unfunded loans. A $272,000 provision for credit losses was recorded for the six months ended March 31, 2025, consisting of a $289,000 provision for credit losses on loan, a $10,000 recapture of credit losses on investment securities, and a $7,000 recapture of credit losses on unfunded loan commitments.
For the quarter ended March 31, 2026 and 2025, there were no net charge-offs. For the six months ended March 31, 2026, there were net recoveries of $18,000 compared to a net charge-offs of $242,000 for the six months ended March 31, 2025, primarily due to the addition of a commercial real estate loan secured by a hotel in Oregon. Non-accrual loans increased by $5.00 million, or 113.4%, to $9.41 million at March 31, 2026 from $4.41 million at September 30, 2025, and increased by $7.08 million, or 300.2%, from $2.33 million at March 31, 2025. Total delinquent loans (past due 30 days or more) and non-accrual loans
increased by $4.74 million, or 83.8%, to $10.40 million at March 31, 2026, from $5.66 million at September 30, 2025 and increased by $7.07 million, or 212.9%, from $3.32 million one year ago.
While management believes the estimates and assumptions used in its determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions will not have a material adverse impact on our financial condition and results of operations. A further decline in national and local economic conditions, as a result of the effects of inflation, changes in interest rates, uncertainty related to trade policy, a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL and may have a material adverse impact on our financial condition and results of operations. In addition, the determination of the amount of the ACL is also 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 our financial condition and results of operations.
For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."
Non-interest Income: Total non-interest income increased by $120,000, or 4.5%, to $2.81 million for the quarter ended March 31, 2026 from $2.69 million for the quarter ended March 31, 2025. This increase was primarily due to a $114,000 increase in gain on sale of loans, reflecting a higher volume of fixed-rate one- to four-family mortgages sold into the secondary market, a $37,000 increase in servicing income on loans sold and smaller increases in several other categories. These increases were partially offset by a $45,000 decrease in ATM and debit card interchange fees, primarily due to lower transaction volume and a $45,000 decrease in service charges on deposits, reflecting lower overdraft-related fee activity.
Total non-interest income for the six months ended March 31, 2026 increased $187,000, or 3.5%, to $5.57 million from $5.38 million for the six months ended March 31, 2025. This increase was primarily due to a $149,000 increase in gain on sale of loans, a $63,000 increase in servicing income on loans sold and smaller increases in several other categories. These increases were partially offset by a $118,000 decrease in ATM and debit card interchange fees, a $35,000 decrease in service charges on deposits and smaller decreases in several other categories.
Non-interest Expense: Total non-interest expense increased by $465,000, or 4.2%, to $11.66 million for the quarter ended March 31, 2026 from $11.19 million for the quarter ended March 31, 2025. This increase was mainly due to a $492,000 increase in salaries and employee benefits due to compensation increases and the filling of open lending positions, a $93,000 increase in state and local taxes expense, a $56,000 increase in technology and communications expense and a $41,000 increase in premises and equipment expense primarily related to the opening of the University Place branch in January 2026. These increases were partially offset by a $106,000 decrease in professional fees expense, a $50,000 decrease in ATM and debit card interchange expense and smaller changes in several other expense categories.
The efficiency ratio for the current quarter improved to 55.38% compared to 56.25% for the comparable quarter one year ago. The improvement in the efficiency ratio was due to a $1.15 million increase in total revenue driven primarily by higher net interest income, which was offset by a $465,000 increase in non-interest expense.
Total non-interest expense increased $830,000, or 3.7%, to $23.09 million for the six months ended March 31, 2026 from $22.26 million for the six months ended March 31, 2025. The increase was primarily due to an $854,000 increase in salary and employee benefits, due to annual compensation increases and the filling of open lending positions, a $205,000 increase in state and local taxes expense, and a $165,000 increase in premises and equipment expense due to the opening of the University Place branch in January 2026. These increases were partially offset by a $136,000 decrease in professional fees expense and a $29,000 decrease in technology and communications expense.
The efficiency ratio improved to 53.99% for the six months ended March 31, 2026 from 56.26% for the six months ended March 31, 2025, reflecting growth in net interest income that outpaced the increase in non-interest expense.
Provision for Income Taxes: The provision for income taxes increased by $33,000, or 1.9%, to $1.74 million for the quarter ended March 31, 2026 from $1.71 million for the quarter ended March 31, 2025. The increase in the provision for income taxes was primarily due to higher pre-tax income. The Company's effective income tax rate was 19.6% for the quarter ended March 31, 2026 and 20.2% for the quarter ended March 31, 2025. The provision for income taxes increased by $421,000, or 12.3%, to $3.84 million for the six months ended March 31, 2026 from $3.42 million for the six months ended March 31, 2025.
The increase was primarily due to higher pre-tax income. The Company's effective tax rate was 20.0% for the six months ended March 31, 2026 compared to 20.1% for the six months ended March 31, 2025.
Liquidity
The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and borrowings, if needed, from the FHLB and FRB. While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are influenced by general interest rates, economic conditions, and competitive factors.
The Bank maintains an adequate level of liquidity to ensure that sufficient funds are available to fund its operations. It generally holds sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2026, 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 19.39%. The Bank maintains a credit facility with the FHLB providing immediately available borrowings of up to 45% of total assets, limited by available collateral. At March 31, 2026, the Bank had a total of $718.24 million available for borrowings with the FHLB of which $20.00 million was outstanding. Additionally, the Bank maintains a short-term borrowing line with the FRB, with total credit based on eligible collateral, under the Borrower-in-Custody program with $80.17 million available and no outstanding balance at March 31, 2026. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB") and a $25.00 million overnight borrowing line with Zions Bank with no outstanding balance on either line at March 31, 2026. Subject to market conditions, the Bank may utilize these borrowing facilities to fund loan originations and deposits withdrawals, satisfy other financial commitments, repay maturing debt and to pursue investment opportunities as appropriate.
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 six months ended March 31, 2026 and 2025, the Bank originated $144.18 million and $128.66 million of loans, respectively. At March 31, 2026, the Bank had undisbursed lines of credit and commitments to extend credit totaling $178.85 million and undisbursed construction loans in process totaling $90.58 million. Investment securities purchased during the six months ended March 31, 2026 and 2025 totaled $24.95 million and $22.42 million, respectively.
The Bank's liquidity is also affected by the volume of loans sold and loan principal payments. During the six months ended March 31, 2026 and 2025, the Bank sold $19.76 million and $7.48 million, respectively, in loans and loan participation interests. During the six months ended March 31, 2026 and 2025, the Bank received $173.56 million and $117.67 million in principal repayments, respectively.
The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment, and investment securities available for sale (including equity securities) increased to $393.37 million at March 31, 2026 from $328.89 million at September 30, 2025. CDs that are scheduled to mature in less than one year from March 31, 2026 totaled $424.29 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.
Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets. Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.
For the remainder of the 2026 fiscal year, the Bank projects that fixed commitments will include approximately $176,000 of operating lease payments. All $20.00 million of FHLB borrowings are scheduled to mature during fiscal year 2026. In addition, at March 31, 2026, the Bank had other future obligations and accrued expenses totaling $9.15 million.
The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.
Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities. However, the Bank's ability to pay dividends is subject to regulatory limitations, including capital adequacy requirements and supervisory approval under certain circumstances. The Bank maintains strong capital levels and earnings capacity, which support its ability to upstream dividends to Timberland Bancorp, subject to applicable regulatory constraints. At March 31, 2026, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $412,000.
The Company currently expects to continue its practice of paying quarterly cash dividends on its common stock, subject to the discretion of the Board of Directors, which may modify or discontinue this practice at any time and for any reason without prior notice. The cash dividend rate announced on April 28, 2026 and payable on May 22, 2026 is $0.29 per share, a level the Company believes appropriately balances the objectives of investing in the Bank and returning capital to shareholders. Based on the number of shares outstanding as of March 31, 2026, continued payment at this rate would result in an average total quarterly dividend of approximately $2.27 million.
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 new stock repurchase program pursuant to which the Company may repurchase up to 5% of the outstanding shares, or 393,842 shares. 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.
Capital Resources
The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at March 31, 2026, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.
The following table compares the Bank's actual capital amounts at March 31, 2026, to its minimum regulatory capital requirements at that date (dollars in thousands):
| Actual |
Regulatory Minimum To Be "Adequately Capitalized" |
To Be "Well Capitalized" Under Prompt Corrective Action Provisions |
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| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
| Leverage Capital Ratio: | |||||||||||||||||||||||||||||||||||
| Tier 1 capital | $256,969 | 12.85 | % | $80,001 | 4.00 | % | $100,001 | 5.00 | % | ||||||||||||||||||||||||||
| Risk-based Capital Ratios: | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | 256,969 | 20.26 | 57,063 | 4.50 | 82,425 | 6.50 | |||||||||||||||||||||||||||||
| Tier 1 capital | 256,969 | 20.26 | 76,084 | 6.00 | 101,446 | 8.00 | |||||||||||||||||||||||||||||
| Total capital | 272,860 | 21.52 | 101,446 | 8.00 | 126,807 | 10.00 | |||||||||||||||||||||||||||||
In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum capital levels. Failure to maintain the required buffer could result in limitations on the Bank's ability to pay dividends, repurchase shares, and pay discretionary bonuses, based on specified percentages of eligible retained income. At March 31, 2026, the Bank's capital exceeded the conservation buffer.
Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve and is subject to capital adequacy requirements under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For bank holding companies with less than $3.0 billion in consolidated assets (as of June 30th of the preceding year), the Federal Reserve capital guidelines are generally applied on a bank only basis. In such cases, the Federal Reserve expects the subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2026, Timberland Bancorp, Inc. would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of March 31, 2026 (dollars in thousands):
| Actual | |||||||||||
| Amount | Ratio | ||||||||||
| Leverage Capital Ratio: | |||||||||||
| Tier 1 capital | $257,350 | 12.82 | % | ||||||||
| Risk-based Capital Ratios: | |||||||||||
| Common equity Tier 1 capital | 257,350 | 20.29 | |||||||||
| Tier 1 capital | 257,350 | 20.29 | |||||||||
| Total capital | 273,242 | 21.55 | |||||||||
Key Financial Ratios and Data
| Three Months Ended March 31, |
Six Months Ended March 31, |
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| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
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PERFORMANCE RATIOS:
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| Return on average assets | 1.43 | % | 1.43 | % | 1.52 | % | 1.42 | % | |||||||||||||||
| Return on average equity | 10.72 | % | 10.95 | % | 11.53 | % | 10.99 | % | |||||||||||||||
| Net interest margin | 3.81 | % | 3.79 | % | 3.83 | % | 3.71 | % | |||||||||||||||
| Efficiency ratio | 55.38 | % | 56.25 | % | 53.99 | % | 56.26 | % | |||||||||||||||
Timberland Bancorp Inc. published this content on May 07, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 07, 2026 at 17:23 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]