What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-12-08 compared with 2020-12-09 · 316 added, 149 removed, 352 unchanged (57% of the section changed)

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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 branches (including its main office in Hoquiam).

At September 30, 2020, the Company had total assets of $1.57 billion, net loans receivable of $1.01 billion, total deposits of $1.36 billion and total shareholders’ equity of $187.63 million.

At September 30, 2021, the Company had total assets of $1.79 billion, net loans receivable of $968.45 million, total deposits of $1.57 billion and total shareholders’ equity of $206.90 million.

The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

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Management attempts to maintain a net interest margin placing it within the top quartile of its Washington State peers.

Because of the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the 150 basis point reductions in the targeted federal funds rate (in March 2020), until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected.

Because of the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected.

The provision for (recapture of) loan losses 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 allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio.

The Company recorded provisions for loan losses of $3.70 million for the year ended September 30, 2020 compared to none for the year ended September 30, 2019 due primarily to forecasted probable loan losses reflecting the potential future impact of the COVID-19 pandemic on the economy.

On March 24, 2020, Washington State Governor Jay Inslee signed a statewide order due to the COVID-19 pandemic requiring residents to stay-at-home unless involved in an essential activity.

All business, except those that are considered essential, were also ordered to close.

Although the stay-at-home order has been lifted and certain businesses were allowed to re-open, many restrictions remain in place.

As an essential business, the Company took various steps to ensure the safety of customers and personnel including branch lobby closures.

To ensure the safety of the Company's customers and employees, services are offered through drive up facilities and/or by appointment at some locations and other branch offices are now open

on a modified basis.

Some of the Company's employees are working remotely or have flexible work schedules, and protective measures within the Company's offices have been established to help ensure the safety of those that employees who must work on-site.

The Company did not record a provision for loan losses for the year ended September 30, 2021, primarily reflecting the improving economy and the resulting decline in forecasted probable loan losses from COVID-19 during this fiscal year.

The Company recorded a provision for loan losses of $3.70 million for the year ended September 30, 2020, which was due primarily to forecasted probable loan losses reflecting the potential future impact of the COVID-19 pandemic on the economy based on the economic outlook at that time..

The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of the COVID-19 pandemic.

The Company remains focused on keeping its employees safe and the Bank running effectively to serve its customers.

The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and public health authority guidelines.

The Company has worked with loan customers on loan deferral and forbearance plans.

In response to requests from borrowers, the Company made payment deferral modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans.

The majority of these borrowers had resumed making payments as of September 30, 2020 and only five loans totaling $5.87 million remained on deferral status as of that date.

These modifications were not classified as TDRs at September 30, 2020 in accordance with guidance of the CARES Act and related regulatory guidance.

The majority of these borrowers had resumed making payments as of September 30, 2021 with one loan totaling $233,000 on deferral status compared to five loans totaling $5.87 million on deferral status as of September 30, 2020.

These modifications were not classified as TDRs at September 30, 2021 and 2020 in accordance with guidance of the CARES Act and related regulatory guidance.

The CARES Act also authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020 through its conclusion in August 2020.

As of September 30, 2020, the Company had $126.82 million in PPP loans to new and existing customers who are small to midsize businesses as well as non-profit organizations, independent contractors, and partnerships as allowed under PPP guidance issued in April 2020.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020 through the program's initial conclusion in August 2020.

The CAA 2021, which was signed into law on December 27, 2020, renewed and extended the PPP until May 31, 2021.

As a result, the Company began originating PPP loans again in January 2021.

As of September 30, 2021, the Company had $40.92 million in PPP loans to new and existing customers who are small to midsize businesses as well as non-profit organizations, independent contractors, and partnerships as allowed under PPP guidance.

Net income is also affected by non-interest income and non-interest expense.

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Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any.

Non-interest income is also decreased by by valuation allowances on servicing rights and increased by recoveries of valuation allowances on servicing rights, if any.

Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.

Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses and other non-interest expenses.

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We have a community bank strategy that emphasizes responsive and personalized service to our customers.

As a result of the consolidation of banks in our market areas, we believe there is an opportunity for a community and customer focused bank to expand its customer base.

By offering timely decision making, delivering appropriate banking products and services, and providing customer access to our senior managers we believe community banks, such as Timberland Bank, can distinguish themselves from larger banks operating in our market areas.

We believe we have a significant opportunity to attract additional borrowers and depositors and expand our market presence and market share within our extensive branch footprint.

As a result of the consolidation of banks in our market areas, we believe that there is an opportunity for a community and customer focused bank to expand its customer base.

By offering timely decision making, delivering appropriate banking products and services, and providing customer access to our senior managers, that we believe that community banks, such as Timberland Bank, can distinguish themselves from larger banks operating in our market areas.

We believe that we have a significant opportunity to attract additional borrowers and depositors and expand our market presence and market share within our extensive branch footprint.

Portfolio diversification.

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We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions and accepting short payoffs on delinquent loans when such actions have been deemed appropriate.

We have also accepted short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure.

Although the Company plans to continue to place emphasis on certain lending products, such as commercial real estate loans, construction loans, and commercial business loans, the Company expects to continue to manage its credit exposures through the use of experienced bankers and an overall conservative approach to lending.

Selected Financial Data

The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company and its subsidiary at and for the dates indicated.

The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiary presented herein.

At September 30,

2021 2020 2019 2018 2 2017

(In thousands)

SELECTED FINANCIAL CONDITION DATA:

Total assets $ 1,792,180 $ 1,565,978 $ 1,247,132 $ 1,018,290 $ 952,024

Loans receivable, net 968,454 1,013,875 886,662 725,391 690,364

MBS and other investments held-to-maturity 69,102 27,890 31,102 12,810 7,139

MBS and other investments available-for-sale 63,176 57,907 22,532 1,154 1,241

FHLB Stock 2,103 1,922 1,437 1,190 1,107

Other investments

3,000 3,000 3,000 3,000 3,000

Cash and due from financial institutions, interest-bearing deposits in banks and fed funds sold

580,196 314,452 143,015 148,864 148,188

Certificates of deposit held for investment 28,482 65,545 78,346 63,290 43,034

OREO and other repossessed assets 157 1,050 1,683 1,913 3,301

Deposits 1,570,555 1,358,406 1,068,227 889,506 837,898

FHLB advances 5,000 10,000 — — —

Shareholders' equity 206,899 187,630 171,067 124,657 111,000

Year Ended September 30,

2021 2020 2019 2018 2017

(In thousands, except per share data)

SELECTED OPERATING DATA:

Interest and dividend income $ 54,962 $ 55,583 $ 55,725 $ 41,833 $ 38,338

Interest expense 3,104 4,701 4,565 2,778 3,197

Net interest income 51,858 50,882 51,160 39,055 35,141

Provision for loan losses — 3,700 — — (1,250)

Net interest income after provision for loan losses 51,858 47,182 51,160 39,055 36,391

Non-interest income 17,161 17,188 14,341 12,544 12,368

Non-interest expense 34,591 34,063 35,580 29,177 27,516

Income (loss) before income taxes 34,428 30,307 29,921 22,422 21,243

Provision for state income taxes — — — — —

Provision (benefit) for federal income taxes 6,845 6,038 5,901 5,701 7,076

Net income (loss) $ 27,583 $ 24,269 $ 24,020 $ 16,721 $ 14,167

Net income (loss) per common share:

Basic $ 3.31 $ 2.91 $ 2.89 $ 2.28 $ 1.99

Diluted $ 3.27 $ 2.88 $ 2.84 $ 2.22 $ 1.92

Dividends per common share $ 1.03 $ 0.85 $ 0.78 $ 0.60 $ 0.50

Dividend payout ratio (1) 31.14 % 29.19 % 27.04 % 26.5 % 25.7 %

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(1) Cash dividends to common shareholders divided by net income to common shareholders.

At September 30,

2021 2020 2019 2018 2017

Number of real estate loans outstanding 2,290 2,508 2,766 2,550 2,593

Deposit accounts 58,454 58,566 59,547 55,441 54,707

Full-service offices 24 24 24 22 22

At or For the Year Ended September 30,

2021 2020 2019 2018 2017

KEY FINANCIAL RATIOS:

Performance Ratios:

Return (loss) on average assets (1) 1.64 % 1.75 % 1.96 % 1.70 % 1.53 %

Return (loss) on average equity (2) 13.98 13.59 14.91 14.27 13.65

Interest rate spread (3) 3.13 3.70 4.31 4.10 3.93

Net interest margin (4) 3.25 3.90 4.50 4.23 4.07

Average interest-earning assets to average interest-bearing liabilities

162.08 155.98 148.15 144.17 137.75

Non-interest expense as a percent of average total assets

2.06 2.45 2.91 2.96 2.98

Efficiency ratio (5) 50.12 50.04 54.32 56.55 57.92

Asset Quality Ratios:

Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net

0.29 % 0.28 % 0.34 % 0.18 % 0.28 %

Non-performing assets as a percent of total assets (6)

0.18 0.27 0.40 0.36 0.60

Allowance for loan losses as a percent of total loans receivable, net (7)

1.37 1.31 1.08 1.30 1.36

Allowance for loan losses as a percent of non-performing loans (8)

471.93 461.76 319.49 723.61 499.90

Net charge-offs (recoveries) to average outstanding loans — — (0.02) — (0.14)

Capital Ratios:

Total equity-to-assets ratio 11.54 % 11.98 % 13.71 % 12.24 % 11.66 %

Average equity to average assets 11.74 12.85 13.17 11.90 11.25

__________________

(1) Net income divided by average total assets.

(2) Net income divided by average total equity.

(3) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.

(4) Net interest income before provision for (recapture of) loan losses as a percentage of average interest-earning assets.

(5) Non-interest expenses divided by the sum of net interest income and non-interest income.

(6) Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing, non-accrual investment securities, OREO and other repossessed assets.

(7) Loans receivable is before the allowance for loan losses.

(8) Non-performing loans include non-accrual loans and loans past due 90 days or more and still accruing.

TDRs that are on accrual status are not included.

Critical Accounting Policies and Estimates

The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company's Consolidated Financial Statements.

The Company has identified six policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements.

These policies relate to the methodology for the determination of the allowance for loan losses, the determination of any OTTI in the fair value of investment securities, the valuation of servicing rights, the valuation of OREO, the valuation of assets acquired and liabilities assumed in acquisitions and the valuation of goodwill for potential impairment.

These policies and the judgments, estimates and assumptions are described in greater detail in the notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.

In particular, Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies,” generally describes the Company's accounting policies.

The Company has identified six policies that, as a result of judgments,

estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements.

These policies relate to the methodology for the determination of the allowance for loan losses, the determination of any OTTI in the fair value of investment securities, the valuation of loan servicing rights, the valuation of OREO, the valuation of assets acquired and liabilities assumed in acquisitions and the valuation of goodwill for potential impairment.

Management believes that the judgments, estimates and assumptions used in the preparation of the Company's Consolidated Financial Statements are appropriate given the factual circumstances at the time.

However, given the sensitivity of the Company's Consolidated Financial Statements to these critical policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition.

Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods.

There have been no significant changes in our application of accounting policies since September 30, 2021.

For additional information concerning critical accounting policies, see Note 1 of the Notes to Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data." and the following:

Provision and Allowance for Loan Losses

The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The provision for loan losses reflects the amount required to maintain the allowance for loan losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves.

Determining the amount of the allowance for loan losses involves a high degree of judgment.

Among the material estimates required to establish the allowance for loan losses are:

overall economic conditions;

value of collateral;

strength of guarantors;

loss exposure at default;

the amount and timing of future cash flows on impaired loans;

and determination of loss factors to be applied to the various elements of the portfolio.

All of these estimates are susceptible to significant change.

We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses.

The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans.

We increase our allowance for loan losses by charging provisions for probable loan losses against our income.

The allowance for loan losses is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio.

These factors include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans.

Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve.

Recoveries on previously charged off loans are credited to the allowance for loan losses.

The reserve is based upon factors and trends identified by us at the time financial statements are prepared.

Although we use the best information available, future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control.

The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the quality of the loan portfolio as well as individual review of certain large balance loans.

Loans are considered impaired when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral less selling costs and the current status of the economy.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent.

We continue to assess the collateral of these loans and update our appraisals on large balance impaired loans on an annual basis.

To the extent the property values decline, there could be additional losses on these impaired loans, which may be material.

Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported.

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment.

Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans.

Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance.

Losses on specific loans are provided for when the losses are probable and estimable.

General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for.

The level of general reserves is based on analysis of potential exposures existing in

our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared.

The formula allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances.

Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio as of the evaluation date.

The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.

This methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial Statements.

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination.

Fair Value Accounting and Measurement

We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures.

We include in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition.

Additionally, for financial instruments not recorded at fair value we disclose, where required, our estimate of their fair value.

For more information regarding fair value accounting, please refer to Note 18 in the Notes to the Consolidated Financial Statements.

Loan Servicing Rights

Loan servicing rights are recognized as separate assets when rights are acquired through purchase or through sale of loans.

Generally, purchased loan servicing rights are capitalized at the cost to acquire the rights.

For sales of mortgage loans, the value of the loan servicing right is estimated and capitalized.

Fair value is based on market prices for comparable loan servicing contracts.

The fair value of the loan servicing rights includes an estimate of the life of the underlying loans which is affected by estimated prepayment speeds.

The estimate of prepayment speeds is based on current market conditions.

Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the loan servicing right.

Capitalized loan servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Valuation of OREO

Real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure are recorded at the lower of cost or fair value less estimated costs to sell.

Fair value is generally determined by management based on a number of factors, including third-party appraisals of fair value in an orderly sale.

Accordingly, the valuation of OREO is subject to significant external and internal judgment.

If the carrying value of the loan at the date a property is transferred into OREO exceeds the fair value less estimated costs to sell, the excess is charged to the allowance for loan losses.

Management periodically reviews OREO values to determine whether the property continues to be carried at the lower of its recorded book value or fair value, net of estimated costs to sell.

Any further decreases in the value of OREO are considered valuation adjustments and are charged to non-interest expense in the Consolidated Income Statements.

Expenses and income from the maintenance and operations and any gains or losses from the sales of OREO are included in non-interest expense.

Business Combinations

The Company applies the acquisition method of accounting for business combinations.

Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values.

Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values.

Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized.

Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company's common stock in a business combination and the Company chooses to record these acquisition-related costs through stockholders' equity.

There were no

business combinations during the years ended September 30, 2021 and September 30, 2020.

For additional information see Note (2) Business Combination of the Notes to Consolidated Financial Statements included in Item 8.

Financial Statements..

Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment.

An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment.

If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed.

The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit's estimated fair values, including goodwill, to its carrying amount.

If the fair value exceeds the carry amount then goodwill is not considered impaired.

If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit.

The impairment loss would be recognized as a charge to earnings.

Market Risk and Asset and Liability Management

13 unchanged sentences

The Bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities.

The primary elements of this strategy involve originating ARM loans for its portfolio, maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to four-family residential mortgage loans, matching asset and liability maturities, investing in short-term securities, and originating fixed-rate loans for retention or sale in the secondary market while retaining the related servicing rights.

Sharp increases or decreases in interest rates may adversely affect the Bank's earnings.

Management of the Bank monitors the Bank's interest rate sensitivity through the use of a model provided by NXTsoft Data Analytics, LLC (“NXTsoft”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry.

Based on a rate shock analysis prepared by NXTsoft based on data at September 30, 2020, an immediate increase in interest rates of 100 basis points would increase the Bank’s projected net interest income by approximately 7.7%, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period.

Based on a rate shock analysis prepared by NXTsoft using data at September 30, 2021, an immediate increase in interest rates of 100 basis points would increase the Bank’s projected net interest income by approximately 11.6%, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one-year period.

Conversely, an immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 4.7%.

6 unchanged sentences

Consumer, commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans and, accordingly, reduce the Bank’s exposure to fluctuations in interest rates.

At September 30, 2020, the consumer, commercial business and construction loan portfolios amounted to $35.65 million, $196.36 million and $219.50 million, or 3.1%, 17.3% and 19.4% of total loans receivable, respectively.

At September 30, 2021, the consumer, commercial business and construction loan portfolios amounted to $35.50 million, $115.50 million and $233.21 million, respectively or 3.3%, 10.7% and 21.5%, respectively of total loans receivable.

Quantitative Aspects of Market Risk.

22 unchanged sentences

In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 10.6% decrease in NPV and a 4.7% decrease in net interest income.

In the event of a 100 basis point increase in interest rates, an 8.3% increase in NPV and a 7.7% increase in net interest income would be expected.

In the event of a 100 basis point increase in interest rates, a 6.9% increase in NPV and a 11.6% increase in net interest income would be expected.

Based upon the modeling described above, the Bank's asset and liability structure generally results in increases in net interest income and NPV in a rising interest rate scenario and decreases in net interest income and NPV in a declining interest rate scenario.

6 unchanged sentences

The Company's total assets increased by $226.20 million, or 14.4%, to $1.79 billion at September 30, 2021 from $1.57 billion at September 30, 2020.

The increase in assets was primarily due to increase in total cash and cash equivalents, net loans receivable, and investment securities.

The increase in total assets was funded primarily by increases in total deposits and FHLB borrowings.

Net loans receivable increased by $127.21 million, or 14.3%, to $1.01 billion at September 30, 2020 from $886.66 million at September 30, 2019, primarily due to increases in commercial business (including $126.82 million of SBA PPP loans), commercial real estate, and multi-family loans.

These increases were partially offset by decreases in one- to four-family mortgage and consumer loans.

Total deposits increased by $290.18 million, or 27.2%, to $1.36 billion at September 30, 2020 from $1.07 billion at September 30, 2019, primarily due to increases in non-interest bearing demand account balances, NOW checking account balances, savings account balances, and money market account balances.

The increase in assets was primarily due to an increase in total cash and cash equivalents, and to a much lesser extent, an increase in investment securities, partially offset by decreases in CDs held for investment and loans receivable.

The increase in total assets was funded primarily by an increase in total deposits.

Net loans receivable decreased by $45.42 million, or (4.5)%, to $968.45 million at September 30, 2021 from $1.01 billion at September 30, 2020, primarily due to decreases in SBA PPP loans, and smaller decreases in several other loan categories.

These decreases to net loans receivable were partially offset by increases in commercial real estate and construction loans, and smaller increases in several other loan categories.

Total deposits increased by $212.15 million, or 15.6%, to $1.57 billion at September 30, 2021 from $1.36 billion at September 30, 2020, primarily due to increases in non-interest-bearing demand account balances, NOW checking account balances, money market account balances, and savings account balances.

These increases were partially offset by a decrease in certificates of deposit account balances.

Shareholders' equity increased by $19.27 million, or 10.3%, to $206.90 million at September 30, 2021 from $187.63 million at September 30, 2020.

The increase was primarily due to net income for the year ended September 30, 2020 of $24.27 million which was partially offset by $7.08 million in dividends paid to shareholders and $1.24 million in common stock repurchases.

The increase was primarily due to net income for the year ended September 30, 2021 of $27.58 million which was partially offset by $8.59 million in dividends paid to shareholders.

A more detailed explanation of the changes in significant balance sheet categories follows:

1 unchanged sentence

Cash and cash equivalents increased by $265.74 million, or 84.5%, to $580.20 million at September 30, 2021 from $314.45 million at September 30, 2020.

The increase was primarily a result of increases in total deposits, which exceeded the funds required for loan originations and purchases of investment securities.

The increase was primarily a result of an increase in total deposits, which exceeded the funds required for loan originations and purchases of investment securities.

CDs Held for Investment:

CDs held for investment decreased by $37.06 million, or 56.5%, to $28.48 million at September 30, 2021 from $65.55 million at September 30, 2020.

Funds received as CDs matured were invested into other interest-earning assets as interest rates on CDs decreased during the year.

Funds received as CDs matured were invested into other higher yielding interest-earning assets as interest rates on CDs held for investment decreased during the year.

Investment Securities and Investments in Equity Securities:

Investment securities and investments in equity securities increased by $46.46 million, or 53.6%, to $133.23 million at September 30, 2021 from $86.77 million at September 30, 2020.

The increase was primarily due to the purchase of additional agency mortgage-backed investment securities as the Company put a portion of its excess overnight liquidity into higher-earning investment securities during the year ended September 30, 2020.

The increase was primarily due to the purchase of U.S.

Treasury and U.S.

government agency securities and additional agency and private label residential mortgage-backed investment securities as the Company put a portion of its excess overnight liquidity into higher-earning investment securities during the year ended September 30, 2021.

These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities.

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Financial Statements and Supplementary Data."

FHLB stock increased by $485,000, or 33.8%, to $1.92 million at September 30, 2020 from $1.44 million at September 30, 2019, due to purchases required by the FHLB as a result of the increase in total assets and FHLB borrowings.

FHLB stock increased by $181,000 or 9.4%, to $2.10 million at September 30, 2021 from $1.92 million at September 30, 2020, due to purchases required by the FHLB as a result of the increase in total assets.

Other Investments:

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Loans Held for Sale:

Loans held for sale decreased to $4.51 million, or 25.7%, at September 30, 2020 from $6.07 million at September 30, 2019, primarily due to the timing and volume of mortgage banking loan sales.

Loans held for sale decreased by $1.29 million, or 28.7%, to $3.22 million at September 30, 2021 from $4.51 million at September 30, 2020, primarily due to the timing and volume of mortgage banking loan sales.

The Company sells longer-term fixed-rate residential loans and the guaranteed portion of SBA commercial business loans for asset-liability management purposes and to generate non-interest income.

The Company sold $150.20 million in loans during the year ended September 30, 2021 compared to $167.24 million for the year ended September 30, 2020.

Sales of loans increased primarily due to increased refinance activity for one- to four-family loans due to the decrease in mortgage interest rates.

Sales of loans over the past two years have increased, from historical levels, primarily due to increased refinance activity for one- to four-family loans due to the decrease in mortgage interest rates.

Loans Receivable, Net of Allowance for Loan Losses:

Net loans receivable increased by $127.21 million, or 14.3%, to $1.01 billion at September 30, 2020 from $886.66 million at September 30, 2019.

The increase consisted of a $131.60 million increase in commercial business loans (including a $126.82 million increase in SBA PPP loans), a $34.46 million increase in commercial real estate loans, a $9.02 million increase in multi-family loans and smaller increases in several other categories.

These increases were partially offset by a $14.08 million decrease in one- to four-family loans, an $8.85 million decrease in consumer loans and smaller decreases in several other categories.

Net loans receivable decreased by $45.42 million, or (4.5)%, to $968.45 million at September 30, 2021 from $1.01 billion at September 30, 2020.

The decrease was primarily due to an $85.90 million decrease in SBA PPP loans, a $5.64 million decrease in land loans, and smaller decreases in several other loan categories.

These decreases were partially offset by a $17.08 million increase in commercial real estate loans, a $13.71 million increase in construction loans, and smaller increases in several other loan categories.

The SBA PPP loan balances decreased primarily due to borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA and was partially offset by new SBA PPP loans funded after the renewal of the program in December 2020.

Loan originations increased by $5.16 million, or 0.9%, to $602.34 million for the year ended September 30, 2021 from $597.19 million for the year ended September 30, 2020.

The increase in loan originations was primarily due to the funding of SBA PPP loans, increased loan demand for one- to four-family mortgage loan refinances, and the funding of several larger commercial business and commercial real estate loans.

The increase in loan originations was primarily due to increased demand for commercial real estate and construction loans, which was partially offset by a decrease in SBA PPP loans funded.

For additional information on loans, see "Item 1.

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Premises and Equipment, Net:

Premises and equipment increased by $205,000, or 0.9%, to $23.04 million at September 30, 2020 from $22.83 million at September 30, 2019.

The increase was primarily due to capitalized remodeling costs associated with the Company's new data center facility.

This increase was partially offset by normal depreciation and the sale of land acquired in the South Sound Acquisition that had been held for future expansion.

Premises and equipment decreased by $668,000, or 2.9%, to $22.37 million at September 30, 2021 from $23.04 million at September 30, 2020.

The decrease was primarily due to normal depreciation.

For additional information on premises and equipment, see "Item 2.

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OREO and Other Repossessed Assets:

OREO and other repossessed assets decreased by $633,000, or 37.6%, to $1.05 million at September 30, 2020 from $1.68 million at September 30, 2019.

The decrease was primarily due to the sales of $460,000 in OREO properties and OREO valuation write-downs of $173,000.

At September 30, 2020, total OREO and other repossessed assets consisted of six land parcels totaling $1.05 million.

The largest OREO property at September 30, 2020 was an undeveloped land parcel located in Lewis County with a balance of $702,000.

OREO and other repossessed assets decreased by $893,000, or 85.0%, to $157,000 at September 30, 2021 from $1.05 million at September 30, 2020.

The decrease was primarily due to the sales of $893,000 in OREO properties.

At September 30, 2021, total OREO and other repossessed assets consisted of three land parcels totaling $157,000.

For additional information on OREO and other repossessed assets, see "Item 1.

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The increase was due to net BOLI earnings, representing the increase in cash surrender value of the BOLI policies.

The recorded amount of goodwill remained unchanged at $15.13 million at September 30, 2020 from September 30, 2019.

The recorded amount of goodwill remained unchanged at $15.13 million at both September 30, 2021 and September 30, 2020.

The Company performed its annual review of goodwill during the quarter ended June 30, 2021 and determined that there was no impairment.

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Financial Statements and Supplementary Data."

Servicing Rights, Net:

Servicing rights increased by $687,000, or 28.5%, to $3.10 million at September 30, 2020 from $2.41 million at September 30, 2019, primarily due to additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained, which was partially offset by amortization and valuation allowances.

The principal amount of loans serviced for Freddie Mac and the SBA increased by $27.46 million, or 6.9%, to $426.58 million at September 30, 2020 from $399.12 million at September 30, 2019.

For additional information on servicing rights, see Note 9 to the Consolidated Financial Statements contained in "Item 8.

Loan Servicing Rights, Net:

Loan servicing rights increased by $387,000, or 12.5%, to $3.48 million at September 30, 2021 from $3.10 million at September 30, 2020, primarily due to additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained, and a $110,000 valuation recovery, which was partially offset by amortization.

The principal amount of loans serviced for Freddie Mac and the SBA decreased by $144,000 to $426.44 million at September 30, 2021 from $426.58 million at September 30, 2020.

For additional information on loan servicing rights, see Note 9 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

Operating Lease Right-of-Use Assets:

Operating lease right-of-use-assets increased to $2.59 million at September 30, 2020 as the Company adopted ASC 842 on October 1, 2019 and began recording operating lease right-of-use assets and operating lease liabilities on the balance sheet.

The operating lease right-of-use assets at September 30, 2020 represented the present value of three operating leases on branch facilities.

The Company adopted the provisions of ASC 842 utilizing the optional transition method and therefore prior periods have not been restated.

Operating lease ROU assets decreased by $304,000, or 11.8%, to $2.28 million at September 30, 2021 from $2.59 million at September 30, 2020, primarily due to the amortization of the ROU assets.

The operating lease ROU assets at September 30, 2021 represented the present value of three operating leases on branch facilities.

For additional information on leases, see Note 10 to the Consolidated Financial Statements contained in "Item 8.

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Other Assets:

Other assets decreased by $2.02 million, or 38.0%, to $3.30 million at September 30, 2020 from $5.32 million at September 30, 2019.

Other assets decreased by $425,000, or 12.9%, to $2.87 million at September 30, 2021 from $3.30 million at September 30, 2020.

The decrease was primarily due to decreases in miscellaneous receivables (including income tax receivables) and prepaid expenses.

Deposits increased by $212.15 million, or 15.6%, to $1.57 billion at September 30, 2021 from $1.36 billion at September 30, 2020.

The increase consisted of a $145.42 million increase in non-interest bearing demand account balances, a $79.84 million increase in NOW checking account balances, a $55.36 million increase in savings account balances, and a $16.69 million increase in money market account balances.

The increase consisted of a $93.32 million increase in non-interest bearing demand account balances, a $53.20 million increase in NOW checking account balances, a $49.20 million increase in money market account balances, and a $40.82 increase in savings account balances.

These increases were partially offset by a $24.40 million decrease in certificates of deposit account balances.

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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 increased to $10.00 million at September 30, 2020, as the Company borrowed funds consistent with its asset-liability objectives in March 2020 as long-term rates dropped to historic lows in response to the COVID-19 pandemic.

At September 30, 2020, FHLB borrowings consisted of two $5.00 million borrowings, with scheduled maturities at March 2025 and March 2027, which bear interest at 1.19% and 1.11%, respectively.

The Company did not have any FHLB borrowings at September 30, 2019.

FHLB borrowings decreased to $5.00 million at September 30, 2021 from $10.00 million at September 30, 2020.

At September 30, 2021, FHLB borrowings

consisted of a single $5.00 million borrowing, with a scheduled maturity in March 2025.

For additional information on FHLB borrowings, see Note 12 to the Consolidated Financial Statements contained in "Item 8.

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Operating Lease Liabilities:

Operating lease liabilities increased to $2.63 million at September 30, 2020 as the Company adopted ASC 842 on October 1, 2019 and began recording operating lease liabilities and operating lease right-of-use assets on the balance sheet.

Operating lease liabilities decreased by $271,000, or 10.3%, to $2.36 million at September 30, 2021 from $2.63 million at September 30, 2020, primarily due to required annual lease payments.

The operating lease liability at September 30, 2021 represented the present value of three operating leases on branch facilities.

The Company adopted the provisions of ASC 842 utilizing the optional transition method and therefore prior periods have not been restated.

For additional information on leases, see Note 10 to the Consolidated Financial Statements contained in "Item 8.

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Other Liabilities and Accrued Expenses:

Other liabilities and accrued expenses decreased by $526,000, or 6.7%, to $7.31 million at September 30, 2020 from $7.84 million at September 30, 2019.

The decrease was primarily due to timing differences in the normal course of business and a reduction in deferred compensation payable.

Other liabilities and accrued expenses increased by $55,000, or 0.8%, to $7.37 million at September 30, 2021 from $7.31 million at September 30, 2020.

The increase was primarily due to timing differences in the normal course of business.

Shareholders' Equity:

Total shareholders' equity increased by $19.27 million, or 10.3%, to $206.90 million at September 30, 2021 from $187.63 million at September 30, 2020.

The increase was primarily due to net income of $24.27 million for the year ended September 30, 2020, which was partially offset by the payment of $7.08 million in dividends to common shareholders and the repurchase of 56,601 shares of the Company's common stock for $1.24 million during the year ended September 30, 2020.

The increase was primarily due to net income of $27.58 million for the year ended September 30, 2021, which was partially offset by the payment of $8.59 million in dividends to common shareholders and the repurchase of 19,588 shares of the Company's common stock for $527,000 during the year ended September 30, 2021.

For additional information on shareholders' equity, see the Consolidated Statements of Shareholders' Equity contained in "Item 8.

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Comparison of Operating Results for the Years Ended September 30, 2021 and 2020

Net income for the year ended September 30, 2020 increased by $249,000, or 1.0%, to $24.27 million from $24.02 million for the year ended September 30, 2019.

Net income per diluted common share increased by $0.04, or 1.4%, to $2.88

for the year ended September 30, 2020 from $2.84 for the year ended September 30, 2019.

The increase in net income was primarily due to an increase in non-interest income and a decrease in non-interest expense.

These increases to net income were partially offset by an increase in the provision for loan losses and a decrease in net interest income.

The increase in non- interest income was primarily due to an increase in gain on sales of loans.

The decrease in non-interest expense was primarily due to a decrease in data processing and telecommunication expenses.

The increase in the provision for loan losses was primarily due to economic uncertainties associated with the COVID-19 pandemic.

Net income for the year ended September 30, 2021 increased by $3.31 million, or 13.7%, to $27.58 million from $24.27 million for the year ended September 30, 2020.

Net income per diluted common share increased by $0.39, or 13.5%, to $3.27 for the year ended September 30, 2021 from $2.88 for the year ended September 30, 2020.

The increase in net income was primarily due to a $3.70 million decrease in the provision for loan losses and a $976,000 increase in net-interest income.

These increases in net interest income were partially offset by a $528,000 increase in non-interest expense and an $807,000 increase in the provision for income taxes.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income:

Net interest income decreased by $278,000, or 0.5%, to $50.88 million for the year ended September 30, 2020 from $51.16 million for the year ended September 30, 2019.

The decrease in net interest income was primarily due to a decrease in the average yield on interest-earning assets, which was partially offset by an increase in the average balance of interest-earning assets.

Net interest income increased by $976,000, or 1.9%, to $51.86 million for the year ended September 30, 2021 from $50.88 million for the year ended September 30, 2020.

The increase in net interest income was primarily due to an increase in the average balance of interest-earning assets and a decrease in the average cost of deposits, which was partially offset by a decrease in the average yield on interest-earning assets.

Total interest and dividend income decreased by $621,000, or 1.1%,to$54.96 million for the year ended September 30, 2021 from $55.58 million for the year ended September 30, 2020, primarily due to a decrease in the average yield on interest-earning assets, which was partially offset by an increase in the average balance of interest-earning assets.

The average yield on interest-earnings assets decreased to 4.26% for the year ended September 30, 2020 from 4.90% for the year ended September 30, 2019 as market rates decreased.

Beginning in August 2019, the Federal Reserve reduced the targeted federal funds rate by 25 basis points three times in 2019 and during the quarter ended March 31, 2020 by 150 basis points in response to the COVID-19 pandemic, to a range of 0.00% to 0.25% at September 30, 2020.

The average yield on interest-earnings assets decreased to 3.45% for the year ended September 30, 2021 from 4.26% for the year ended September 30, 2020, as market rates decreased following the 150 basis point decrease in the targeted federal funds rate in March 2020 in response to the COVID-19 pandemic, to a range of 0.00% to 0.25% at September 30, 2021 putting downward pressure on adjustable rate instruments combined with the impact of the low loan yields on the SBA PPP loan portfolio and lower loan yields on new loan originations.

The substantial increase in the average balance of interest-bearing deposits in banks and CDs balances as a result of the increase in deposit balances, is also negatively impacting the average yield on interest-earning assets..

Partially offsetting the decrease in the average yield on interest-earning assets was an increase in the average balance of interest-earning assets.

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During the year ended September 30, 2021, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $340,000 compared to $597,000 for the year ended September 30, 2020.

The accretion of the net fair value discount on acquired loans increased the average yield on loans by six basis points for the year ended September 30, 2020 and seven basis points for the year ended September 30, 2019.

The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines.

The accretion of the net fair value discount on acquired loans increased the average yield on loans by three basis points for the year ended September 30, 2021 and six basis points for the year ended September 30, 2020.

The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is

expected to decrease over time as the balance of the net discount declines.

The remaining net discount on these acquired loans was $449,000 at September 30, 2021.

During the year ended September 30, 2021, a total of $942,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $911,000 for the year ended September 30, 2020.

Also impacting the average yield and average interest-earning asset balances during the year ended September 30, 2020 were SBA PPP loans originated.

Also impacting the average yield and average interest-earning asset balances during the years ended September 30, 2021 and 2020 were SBA PPP loans originated.

These PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each loan.

For the year ended September 30, 2020, average PPP loans were $55.40 million and the Company recorded $556,000 in interest income and accreted $1.04 million in PPP loan origination fees into income.

Interest income on investment securities increased by $315,000, or 24.9%, to $1.58 million for the year ended September 30, 2020 from $1.26 million for the year ended September 30, 2019 primarily due to an increase in the average balance of investment securities, which was partially offset by a decrease in the average yield on investment securities.

For the year ended September 30, 2021, average PPP loans were $107.00 million and the Company recorded $1.06 million in interest income and accreted $5.07 million in PPP loan origination fees into income compared to average PPP loans of $55.40 million, $556,000 in interest income and $1.04 million in PPP loan origination fees for the year ended September 30, 2020.

The Company anticipates that interest income related to PPP loans will decrease significantly during the year ending September 30, 2022 as the remaining PPP loan balances and deferred loan originations fees have been reduced.

At September 30, 2021, the Company had $1.83 million in PPP deferred loan origination fees, which will be accreted into interest income over the remaining life of the PPP loans.

Interest income on investment securities decreased by $384,000, or 24.3%, to $1.20 million for the year ended September 30, 2021 from $1.58 million for the year ended September 30, 2020 primarily due to a decrease in the average yield on investment securities, which was partially offset by an increase in the average balance of investment securities.

Interest income on interest-bearing deposits in banks and CDs decreased by $1.42 million, or 56.0%, to $1.12 million for the year ended September 30, 2021 from $2.54 million for the year ended September 30, 2020, primarily due to an decrease in the average yield to 0.24% from 1.00% as market rates decreased.

The decrease in the average yield was partially offset by an increase in the average balance of interest-bearing deposits in banks and CDs.

Total interest expense increased by $136,000, or 3.0%, to $4.70 million for the year ended September 30, 2020 from $4.57 million for the year ended September 30, 2019.

The increase in interest expense was primarily due to a increases in the average balances of interest-bearing deposits and FHLB borrowings, which were partially offset by a decrease in the average cost of interest-bearing liabilities.

Average interest-bearing deposits increased by $62.52 million, or 8.1%, to $829.91 million for the year ended September 30, 2020 from $767.39 million for the year ended September 30, 2019 and average FHLB borrowings increased to $5.69 million for the year ended September 30, 2020 from $0 for the year ended September 30, 2019.

Total interest expense decreased by $1.60 million, or 34.0%, to $3.10 million for the year ended September 30, 2021 from $4.70 million for the year ended September 30, 2020.

The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, primarily deposits, which was partially offset by an increase in the average balance of interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased to 0.32% for the year ended September 30, 2021 from 0.56% for the year ended September 30, 2020 as market interest rates for deposits decreased.

As a result of these changes, the net interest margin decreased 60 basis points to 3.90% for the year ended September 30, 2020 from 4.50% for the year ended September 30, 2019.

Average interest-bearing deposits increased by $146.61 million, or 17.7%, to $976.52 million for the year ended September 30, 2021 from $829.91 million for the year ended September 30, 2020.

The average balance of interest-bearing deposits increased, however, interest expense on deposits decreased by $1.62 million as a result of the decrease in the average cost of interest-bearing deposits primarily as a result of the Company decreasing the interest rates paid on deposit products because of the decreasing rate environment.

The increase in the average balance of interest-bearing deposits is due primarily to proceeds from SBA PPP loans deposited directly into customer accounts, government stimulus checks and an increase in savings trends and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.

The net interest margin decreased 65 basis points to 3.25% for the year ended September 30, 2021 from 3.90% for the year ended September 30, 2020.

Provision for Loan Losses:

Provisions for loan losses totaled $3.70 million for the year ended September 30, 2020 compared to no provision for loan losses for the year ended September 30, 2019.

The provision for loan for the current fiscal year was primarily due to the deteriorating economic conditions and probable loan losses driven by the impact of the COVID-19 pandemic on the U.S.

There was no provision for loans losses for the year ended September 30, 2021 compared to a provision for loan losses of $3.70 million for the year ended September 30, 2020, due primarily to improvement in forecasted probable credit losses from the COVID-19 pandemic on the economy as of September 30, 2021.

The provision for loan losses for the prior fiscal year was primarily due to the deteriorating economic conditions and probable loan losses driven by the impact of the COVID-19 pandemic on the U.S.

and global economies.

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The net charge-offs (recoveries) to average outstanding loans ratio was (0.01)% for the year ended September 30, 2021 and 0.00% for the year ended September 30, 2020.

The level of delinquent loans (loans 30 or more days past due) decreased by $177,000, or 4.5%, to $3.75 million at September 30, 2020 from $3.93 million at September 30, 2019 and the level of loans graded substandard decreased by $1.67 million, or 31.4%, to $3.65 million at September 30, 2020 from $5.32 million at September 30, 2019.

Special mention loans increased by $3.32 million or 130.2%, to $5.86 million at September 30, 2020 from $2.55 million at September 30, 2019.

The level of delinquent loans (loans 30 or more days past due) decreased by $709,000, or 18.9%, to $3.04 million at September 30, 2021 from $3.75 million at September 30, 2020 and the level of loans graded substandard decreased by $45,000, or 1.2%, to $3.60 million at September 30, 2021 from $3.65 million at September 30, 2020.

Special mention loans decreased by $852,000 or 14.5%, to $5.01 million at September 30, 2021 from $5.86 million at September 30, 2020.

Non-accrual loans decreased by $51,000, or 1.8%, to $2.85 million at September 30, 2021 from $2.91 million at September 30, 2020.

The Company has worked with loan customers impacted by the COVID-19 pandemic on loan deferral and forbearance plans.

Most of these borrowers had resumed making payments during the year and only five loans totaling $5.87 million remained on deferral status as of September 30, 2020.

These modifications were not classified as TDRs at September 30, 2020 in accordance with guidance of the CARES Act and related regulatory guidance.

Most of these borrowers have resumed making payments, and only one loan totaling $233,000 was on deferred status as of September 30, 2021 compared to five loans totaling $5.87 million of deferral status as of September 30, 2020.

These modifications were not classified as TDRs in accordance with guidance of the CARES Act and related regulatory guidance.

The $40.92 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at September 30, 2021, as these loans are fully guaranteed by the SBA and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

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The Company believes this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on the comprehensive methodology, management believes the allowance for loan losses of $13.41 million at September 30, 2020 (1.31% of loans receivable and 461.8% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.

While the Company believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses.

Based on the comprehensive methodology, management believes that the allowance for loan losses of $13.47 million at September 30, 2021 (1.37% of loans receivable and 471.9% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.

While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses.

In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.

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Non-interest Income:

Total non-interest income increased by $2.85 million, or 19.9%, to $17.19 million for the year ended September 30, 2020 from $14.34 million for the year ended September 30, 2019.

The increase was primarily due to a $4.23 million increase in gain on sales of loans, recoveries of $483,000 of previously charged off receivables acquired in the South Sound Acquisition (which are recorded in the "Other, net" non-interest category), and smaller increases in several other categories.

These increases were partially offset by a $1.05 million decrease in BOLI net earnings, a $757,000 decrease in

service charges on deposits and smaller decreases in several other categories.

The increase in gain on sales of loans was primarily due to an increase in the dollar amount of fixed rate one- to four-family loans originated and sold during the current year and an increase in the average pricing margin.

The increase in mortgage banking volumes were largely due to increased refinance activity for single family homes due to lower mortgage interest rates.

Net BOLI earnings were higher for the comparable period one year ago primarily due to a BOLI death benefit claim.

Total non-interest income decreased by $27,000, or 0.2%, to $17.16 million for the year ended September 30, 2021 from $17.19 million for the year ended September 30, 2020.

The decrease was primarily due to a $483,000 decrease in recoveries of previously charged off receivables acquired in the South Sound Acquisition (which are recorded in the "Other, net" non- interest income category), a $236,000 decrease in service charges on deposits, a $186,000 decrease in servicing income on loans sold and smaller decreases in several other categories.

These decreases were partially offset by a $706,000 increase in ATM and debit card interchange transaction fees, a $110,000 valuation recovery on loan servicing rights (compared to a $221,000 valuation allowance in the prior year), and smaller increases in several other categories.

The decrease in service charges on deposits was primarily due to a decrease in overdraft fee income.

The decrease in servicing income on loans sold was primarily due to increased amortization of loan servicing rights.

The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the dollar volume of debit card transactions.

The valuation recovery on loan servicing rights was primarily due to a decrease in the projected mortgage prepayment speeds.

The Company's gain on sales of loans decreased by $75,000, or 1.3%, to $5.90 million for the year ended September 30, 2021 from $5.98 million for the year ended September 30, 2020, and increased by $4.15 million, or 236.6%, from $1.75 million for the year ended September 30, 2019.

The Company's gain on sales of loans over the past two fiscal years have been higher than historical averages primarily due to an increase in the dollar amount of fixed rate one- to four-family loans originated and sold and an increase in the average pricing margin.

The increased mortgage banking volumes over the past two fiscal years have been largely driven by increased refinance activity for single family homes due to lower mortgage interest rates.

The Company anticipates that refinance activity for single family homes will decrease and pricing spreads will compress during the year ending September 30, 2022, which will correspondingly result in a decrease in gain on sales of loans compared to the years ended September 30, 2021 and 2020.

Non-interest Expense:

Total non-interest expense decreased by $1.52 million, or 4.3%, to $34.06 million for the year ended September 30, 2020 from $35.58 million for the year ended September 30, 2019.

The decrease was primarily due to a $1.42 million decrease in data processing and telecommunications expense and smaller decreases in several other categories.

Data processing related expenses were elevated for the year ended September 30, 2019 due to the Company's core operating system and ancillary technology systems conversions.

The efficiency ratio for the year ended September 30, 2020 improved to 50.04% from 54.32% for the year ended September 30, 2019.

Total non-interest expense increased by $528,000, or 1.6%, to $34.59 million for the year ended September 30, 2021 from $34.06 million for the year ended September 30, 2020.

The increase was primarily due to a $399,000 increase in salaries and employee benefits expense, a $225,000 increase in data processing and telecommunications expense, a $211,000 increase in FDIC insurance expense, a $203,000 increase in ATM and debit card interchange transaction fees, and smaller increases in several other expense categories.

These increases were partially offset by a $363,000 decrease in OREO and other repossessed assets expense.

The increase in salaries and employee benefits expense was primarily due to

annual salary adjustments.

The increase in data processing and telecommunications expense was primarily due to the addition of several technology products and increased processing volumes.

The increases in FDIC insurance expense was primarily due to an increase in total assets and the absence of an assessment credit which reduced the expense in the year ended September 30, 2020.

The increase in ATM and debit card interchange fees was primarily due to increased debit card transaction volumes.

The improvement in OREO and other repossessed assets expense was primarily due to gains on the sale of OREO and a reduction in remaining OREO properties.

The efficiency ratio for the year ended September 30, 2021 was 50.12% compared to 50.04% for the year ended September 30, 2020.

The Company anticipates increases in non-interest expense during the year ending September 30, 2022, primarily due to inflationary pressures and the hiring of additional lending personnel.

Provision for Income Taxes:

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The increase in the provision for income taxes was primarily due to higher income before income taxes.

The Company's effective income tax rate was 19.9% for the year ended September 30, 2020 compared to 19.7% for the year ended September 30, 2019.

Contributing to the lower effective income tax rate for the year ended September 30, 2019 was a higher percentage of tax-exempt income, primarily due to a BOLI death benefit claim.

The Company's effective income tax rate was 19.9% for both the years ended September 30, 2021 and 2020.

For additional information on income taxes, see Note 14 of the Consolidated Financial Statements contained in "Item 8.

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While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities.

The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations.

The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs.

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At September 30, 2021, the Bank did not have an outstanding balance on this borrowing line.

Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan

originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Liquidity management is both a short and long-term responsibility of the Bank's management.

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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.

The Bank's primary investing activity is the origination of loans and, to a lesser extent, the purchase of investment securities.

During the years ended September 30, 2021, 2020 and 2019, the Bank originated $602.34 million, $597.19 million and $356.04 million of loans, respectively.

At September 30, 2021, the Bank had loan commitments totaling $163.29 million and undisbursed construction loans in process totaling $95.22 million.

The Bank anticipates that it will have sufficient funds available to meet current loan commitments.

CDs that are scheduled to mature in less than one year from September 30, 2020 totaled $102.86 million.

Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Investment securities purchased during the years ended September 30, 2021, 2020 and 2019 totaled $71.75 million, $51.47 million and $34.08 million, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.

During the years ended September 30, 2020, 2019 and 2018, the Bank sold $167.24 million, $73.03 million and $66.40 million in loans and loan participation interests, respectively.

During the years ended September 30, 2020, 2019 and 2018, the Bank received $287.04 million, $241.66 million and $235.61 million in principal repayments, respectively.

The Bank’s liquidity has been impacted by increases in deposit levels.

During the years ended September 30, 2021, 2020 and 2019, the Bank sold $150.20 million, $167.24 million and $73.03 million, respectively, in loans and loan participation interests.

During the years ended September 30, 2021, 2020 and 2019, the Bank received $500.03 million, $287.04 million and $241.66 million, respectively, in principal repayments.

The Bank’s liquidity has been positively impacted by increases in deposit levels.

During the years ended September 30, 2021, 2020 and 2019, deposits increased by $212.15 million, $290.18 million and $178.72 million, respectively.

Cash and cash equivalents, CDs held for investment and investment securities increased to $465.79 million at September 30, 2020 from $275.00 million at September 30, 2019.

As a result, our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities increased to $740.96 million at September 30, 2021 from $465.79 million at September 30, 2020.

CDs that are scheduled to mature in less than one year from September 30, 2021 totaled $81.42 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 on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment.

The amount of capital investment is influenced by, among other things, current and projected demand for services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.

Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the fiscal year ending September 30, 2022 that would materially impact liquidity.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.

The current quarterly common stock dividend rate is $0.21 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank, and returning a substantial portion of cash to shareholders.

Assuming continued payment during 2022 at this rate of $0.21 per share, the average total dividend paid each quarter would be approximately $1.76 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the fiscal year ending September 30, 2022, the Bank projects that fixed commitments will include $342,000 of operating lease payments.

There are no scheduled payments and maturities of FHLB borrowings during fiscal year 2022.

In addition, at September 30, 2021, there were other future obligations and accrued expenses of $7.37 million.

For additional information, see Note 13 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

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.

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Bank holding companies and federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital.

At September 30, 2020, Timberland Bancorp and the Bank were in compliance with all applicable capital requirements.

At September 30, 2021, Timberland Bancorp and the Bank were in compliance with all applicable capital

requirements.

For additional details, see Note 18 to the Consolidated Financial Statements contained in “Item 8.

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Business - Regulation of the Bank - Capital Requirements.”

Contractual obligations.

The following table presents, as of September 30, 2020, the Company’s significant fixed and determinable contractual operating lease obligations by payment date.

There were no other fixed determinable contractual obligations outstanding at September 30, 2020.

Payments due by period

1 year 1 year

3 years After

5 years After

5 years Total

Contractual obligations

(Dollars in thousands)

Long-term debt obligations $ — $ — $ 5,000 $ 5,000 $ 10,000

Operating lease obligations 327 652 630 1,322 2,931

Total contractual obligations $ 327 $ 652 $ 5,630 $ 6,322 $ 12,931

Off-Balance Sheet Activities.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financial needs of its customers.

For information regarding our commitments and off-balance sheet arrangements, see Note 17 of the Notes to Consolidated Financial Statements included in Item 8.

"Financial Statements and Supplementary Data" of this Form 10-K.

A summary of the Company's commitments at September 30, 2020 and 2019 is as follows (in thousands):

Undisbursed portion of construction loans in process $ 100,558 $ 92,226

Undisbursed lines of credit 103,030 80,184

Commitments to extend credit 38,581 16,578

Total commitments $ 242,169 $ 188,988

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation.

The primary impact of inflation on the operation of the Company is reflected in increased operating costs.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.

As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation.

Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

New Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis