TIMBERLAND BANCORP INC (TSBK) Risk Factors

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.

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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, unemployment, recessions, natural disasters, or other adverse events, could materially affect our business, financial condition, and results of operations. Adverse economic developments in our primary market areas of Grays Harbor, Pierce, Thurston, King, Kitsap, and Lewis counties Washington, could also slow our growth, impair our customers’ ability to repay loans, and otherwise negatively impact our business, financial condition, and results of operations.

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.

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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.

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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

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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.

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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

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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.

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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

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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.

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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 unexpected losses 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

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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

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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 unexpected losses. 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.