What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-08 compared with 2021-08-05 · 160 added, 215 removed, 251 unchanged (60% of the section changed)

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When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2021.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three months ended December 31, 2021.

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to:

the effect of the COVID-19 pandemic, including on the Company's credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S.

and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;

potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing COVID-19 pandemic and any governmental or societal responses thereto;

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves;

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secondary market conditions for loans and our ability to sell loans in the secondary market;

results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III;

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our ability to attract and retain deposits;

increases in premiums for deposit insurance;

our ability to control operating costs and expenses;

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

difficulties in reducing risks associated with the loans in our consolidated balance sheet;

difficulties in reducing risks associated with the loans on our consolidated balance sheet;

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-

party vendors who perform several of our critical processing functions;

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

our ability to retain key members of our senior management team;

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changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

including as a result of the CARES Act and the CAA 2021;

the economic impact of war or any terrorist activities;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including as a result of the CAA 2021 and recent COVID-19 vaccination and economic stimulus efforts;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the CARES Act and the CAA 2021;

and other risks described elsewhere in this Form 10-Q and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including our 2021 Form 10-K.

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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 offices (including its main office in Hoquiam).

At June 30, 2021, the Company had total assets of $1.74 billion, net loans receivable of $1.00 billion, total deposits of $1.52 billion and total shareholders’ equity of $203.49 million.

At December 31, 2021, the Company had total assets of $1.83 billion, net loans receivable of $994.01 million, total deposits of $1.61 billion and total shareholders’ equity of $210.38 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 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 that its net interest income and net interest margin will be adversely affected.

Because 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 that 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 did not record a provision for loan losses for the nine months ended June 30, 2021, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during this period.

The Company recorded a provision

for loan losses of $1.00 million and $3.20 million for the three and nine months ended June 30, 2020, respectively, and $3.70 million for the year ended September 30, 2020.

The provisions recorded during the year ended September 30, 2020 were primarily due to forecasted probable loan losses reflecting the potential future impact of the COVID-19 pandemic on the economy.

The Company did not record a provision for loan losses for the three months ended December 31, 2021 and 2020, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during these periods.

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

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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.

Nearly all of these borrowers have resumed making regular payments and only one commercial mortgage loan with a balance of $1.70 million remained on payment deferral status as of June 30, 2021.

This COVID-19 related modification was not classified as a TDR at June 30, 2021 in accordance with the guidance of the CARES Act and related regulatory guidance.

All borrowers who were granted COVID-19 deferrals have resumed making regular payments as of December 31, 2021.

The Company will continue to work on forbearance plans with customers impacted by the COVID-19 pandemic as needed going forward.

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

As of June 30, 2021, the Company had $95.63 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.

As of December 31, 2021, the Company had $21.40 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.

For the three and nine months ended June 30, 2021, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income.

For the three months ended December 31, 2021, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income.

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

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There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2021 Form 10-K.

Comparison of Financial Condition at June 30, 2021 and September 30, 2020

The Company’s total assets increased by $174.48 million, or 11.1%, to $1.740 billion at June 30, 2021 from $1.566 billion at September 30, 2020.

The increase in total assets was primarily due to increased 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.

Comparison of Financial Condition at December 31, 2021 and September 30, 2021

The Company’s total assets increased by $39.10 million, or 2.2%, to $1.831 billion at December 31, 2021 from $1.792 billion at September 30, 2021.

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

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

Net loans receivable decreased by $12.31 million, or 1.2%, to $1.002 billion at June 30, 2021 from $1.014 billion at September 30, 2020, primarily due to a decrease in SBA PPP loans and smaller decreases in several other loan categories.

These decreases to net loans receivable were partially offset by a decrease to the undisbursed portion of construction loans in process, increases in multi-family and commercial mortgage loans, and smaller increases in several other loan categories.

Total deposits increased by $164.25 million, or 12.1%, to $1.523 billion at June 30, 2021 from $1.358 billion at September 30, 2020, primarily due to increases in non-interest-bearing demand account balances, savings account balances, NOW checking account balances, and money market account balances.

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

Shareholders’ equity increased by $15.86 million, or 8.5%, to $203.49 million at June 30, 2021 from $187.63 million at September 30, 2020.

The increase in shareholders' equity was primarily due to net income, partially offset by the payment of dividends to common shareholders.

Net loans receivable increased by $25.55 million, or 2.6%, to $994.01 million at December 31, 2021 from $968.45 million at September 30, 2021, primarily due to increases in commercial real estate loans, construction loans, one-to four-family and commercial business loans (other than SBA PPP loans) and in several other loan categories.

These increases to net loans receivable were partially offset by a decrease in SBA PPP loans, an increase in the undisbursed portion of construction loans in process, and smaller decreases in several other loan categories.

Total deposits increased by $36.08 million, or 2.3%, to $1.607 billion at December 31, 2021 from $1.571 billion at September 30, 2021, primarily due to increases in NOW checking account balances, money market account balances, and savings account balances.

These increases were partially offset by decreases in non-interest bearing account balances and in certificates of deposit account balances.

Shareholders’ equity increased by $3.48 million, or 1.7%, to $210.38 million at December 31, 2021 from $206.90 million at September 30, 2021.

The increase in shareholders' equity was primarily due to net income, partially offset by the payment of dividends to common shareholders and the repurchase of common stock.

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

Cash and Cash Equivalents and CDs Held for Investment:

Cash and cash equivalents and CDs held for investment increased by $154.95 million, or 40.8%, to $534.94 million at June 30, 2021 from $380.00 million at September 30, 2020.

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

Cash and cash equivalents and CDs held for investment decreased by $25.70 million, or 4.2%, to $582.98 million at December 31, 2021 from $608.68 million at September 30, 2021.

The decrease was primarily a result of deploying funds earning a nominal yield into higher-earning loans originations and investment securities.

Investment Securities:

Investment securities (including investments in equity securities) increased by $33.99 million, or 39.2%, to $120.76 million at June 30, 2021 from $86.77 million at September 30, 2020.

Investment securities (including investments in equity securities) increased by $38.87 million, or 29.2%, to $172.10 million at December 31, 2021 from $133.23 million at September 30, 2021.

This increase was primarily due to the purchase of additional mortgage-backed investment securities and U.S.

Treasury securities during the nine months ended June 30, 202,1 as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

Treasury securities during the three months ended December 31, 2021 as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

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

For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

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

FHLB stock was $2.10 million at December 31, 2021 and September 30, 2021.

Other Investments:

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both June 30, 2021 and September 30, 2020.

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both December 31, 2021 and September 30, 2021.

This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Net loans receivable decreased by $12.31 million, or 1.2%, to $1.002 billion at June 30, 2021 from $1.014 billion at September 30, 2020.

The decrease was primarily due to a $31.19 million decrease in SBA PPP loans, a $7.28 million decrease in land loans, a $2.04 million decrease in construction loans, and a smaller decreases in several other loan categories.

These decreases to net loans receivable were partially offset by a $10.23 million decrease in the undisbursed portion of construction loans in process, a $9.70 million increase in multi-family mortgage loans, a $5.32 million increase in commercial mortgage 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 decreased by $12.72 million, or 2.6%, to $470.32 million for the nine months ended June 30, 2021 from $483.04 million for the nine months ended June 30, 2020.

The decrease in loan originations was primarily due to a decrease in the amount of SBA PPP loans funded.

Net loans receivable increased by $25.55 million, or 2.6%, to $994.01 million at December 31, 2021 from $968.45 million at September 30, 2021.

The increase was primarily due to a $26.71 million increase in commercial real estate loans, a $12.32 million increase in construction loans, a $10.43 million increase in commercial business loans (other than SBA PPP loans), a $9.22 million increase in one- to four-family loans and smaller increases in other categories.

These increases were partially offset by a $19.53 million decrease in SBA PPP loans, a $10.79 million increase in the undisbursed portion of construction loans in process, and smaller decreases in several other 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.

Loan originations increased by $20.02 million, or 12.8%, to $176.60 million for the three months ended December 31, 2021 from $156.58 million for the three months ended December 31, 2020.

The increase in loan originations was primarily due to an increase in the amount of commercial real estate loans and commercial business loans (non-PPP) funded.

The Company continued to sell longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income.

The Company also periodically sells the guaranteed portion of SBA loans.

Sales of fixed rate one- to four-family mortgage loans increased by $12.05 million, or 10.6%, to $126.19 million for the nine months ended June 30, 2021 from $114.14 million for the nine months ended June 30, 2020, primarily due to increased refinance activity for one- to four-family loans due to the decrease in mortgage interest rates.

Sales of fixed-rate

one- to four-family mortgage loans decreased by $21.28 million, or 48.5%, to $22.56 million for the three months ended December 31, 2021 from $43.84 million for the three months ended December 31, 2020, primarily due to decreased refinance activity for one- to four-family loans, as mortgage refinance activity diminished as market interest rates increased.

For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Premises and Equipment:

Premises and equipment decreased by $516,000, or 2.2%, to $22.52 million at June 30, 2021 from $23.04 million at September 30, 2020.

Premises and equipment decreased by $259,000, or 1.2%, to $22.11 million at December 31, 2021 from $22.37 million at September 30, 2021.

This decrease was primarily due to normal depreciation.

OREO (Other Real Estate Owned):

OREO and other repossessed assets decreased by $893,000, or 85.0%, to $157,000 at June 30, 2021 from $1.05 million at September 30, 2020, primarily due to the sale of three land parcels.

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

OREO and other repossessed assets was $157,000 at December 31, 2021 and September 30, 2021.

At December 31, 2021, total OREO and other repossessed assets consisted of three land parcels totaling $157,000.

BOLI (Bank Owned Life Insurance):

BOLI increased by $445,000 or 2.1%, to $22.04 million at June 30, 2021 from $21.60 million at September 30, 2020.

BOLI increased by $153,000 or 0.70%, to $22.35 million at December 31, 2021 from $22.19 million at September 30, 2021.

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

Goodwill and CDI:

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

CDI decreased by $271,000, or 16.7%, to $1.35 million at June 30, 2021 from $1.63 million at September 30, 2020 due to scheduled amortization.

The recorded amount of goodwill remained unchanged at $15.13 million at both December 31, 2021 and September 30, 2021.

CDI decreased by $79,000, or 6.3%, to $1.19 million at December 31, 2021 from $1.26 million at September 30, 2021 due to scheduled amortization.

For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Deposits increased by $164.25 million, or 12.1%, to $1.523 billion at June 30, 2021 from $1.358 billion at September 30, 2020.

The increase in total deposits was primarily due to a $54.05 million increase in non-interest bearing demand account balances, a $53.05 million increase in NOW checking account balances, a $40.47 million increase in money market account balances, and a $35.23 million increase in savings account balances.

These increases were partially offset by a $18.56 million decrease in certificates of deposit account balances.

Deposits consisted of the following at June 30, 2021 and September 30, 2020 (dollars in thousands):

June 30, 2021 September 30, 2020

Deposits increased by $36.08 million, or 2.3%, to $1.61 billion at December 31, 2021 from $1.57 billion at September 30, 2021.

The increase was primarily due to a $28.98 million increase in NOW checking account balances, a $12.03 million increase in money market account balances, and an $8.73 million increase in savings account balances.

These increases were partially offset by an $11.69 million decrease in non-interest bearing account balances and a $1.97 million decrease in certificates of deposit account balances.

Deposits consisted of the following at December 31, 2021 and September 30, 2021 (dollars in thousands):

December 31, 2021 September 30, 2021

Amount Percent Amount Percent

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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 decreased to $5.00 million at June 30, 2021 from $10.00 million at September 30, 2020, and consisted of one $5.00 million borrowing, with a scheduled maturity in March 2025.

FHLB borrowings were $5.00 million at December 31, 2021 and September 30, 2021, and consisted of one $5.00 million borrowing, with a scheduled maturity in March 2025.

Due to favorable repayment terms, the Company repaid the borrowing in January 2022.

Shareholders’ Equity:

Total shareholders’ equity increased by $15.86 million, or 8.5%, to $203.49 million at June 30, 2021 from $187.63 million at September 30, 2020.

The increase was primarily due to net income of $21.57 million for the nine months ended June 30, 2021 and $616,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $6.00 million and the repurchase of 19,588 shares of the Company's common stock for $527,000 (an average price of $26.89 per share).

During the quarter ended March 31, 2021, the Company adopted a new stock repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares, or 415,970 shares.

The new stock repurchase program replaced the then existing stock repurchase program, which had 141,952 shares available to be repurchased upon expiration.

Total shareholders’ equity increased by $3.48 million, or 1.7%, to $210.38 million at December 31, 2021 from $206.90 million at September 30, 2021.

The increase was primarily due to net income of $5.49 million for the three months ended December 31, 2021 and $130,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $1.76 million and the repurchase of 15,548 shares of the Company's common stock for $433,000 (an average price of $27.86 per share).

For additional information, see Item 2 of Part II of this Form 10-Q.

Asset Quality:

The non-performing assets to total assets ratio was 0.14% at June 30, 2021 compared to 0.27% at September 30, 2020.

Total non-performing assets decreased by $1.80 million, or 43.2%, to $2.37 million at June 30, 2021 from $4.16 million at September 30, 2020.

The decrease in non-performing assets was due to an $893,000 decrease in OREO and other repossessed assets, a $876,000 decrease in non-accrual loans, and a $30,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at June 30, 2021 and September 30, 2020 (dollars in thousands):

The non-performing assets to total assets ratio was 0.17% at December 31, 2021 compared to 0.18% at September 30, 2021.

Total non-performing assets decreased by $20,000, or 0.6%, to $3.15 million at December 31, 2021 from $3.17 million at September 30, 2021.

The decrease in non-performing assets was due to a $1,000 decrease in non-accrual loans, and a $19,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at December 31, 2021 and September 30, 2021 (dollars in thousands):

2021 September 30,

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(1) As of June 30, 2021 and September 30, 2020, there were no one- to-four family properties in the process of foreclosure.

(2) As of June 30, 2021 and September 30, 2020, the balance of OREO did not include any foreclosed residential real estate property.

(1) As of December 31, 2021, there was one one- to four-family property in the process of foreclosure.

At September 30, 2021, there were two one- to-four family properties in the process of foreclosure.

(2) As of December 31, 2021 and September 30, 2021, the balance of OREO did not include any foreclosed residential real estate property.

(3) Does not include TDRs on accrual status.

(4) Does not include TDRs totaling $187 and $203 reported as non-accrual loans at June 30, 2021 and September 30, 2020, respectively.

(4) Does not include TDRs totaling $177 and $182 reported as non-accrual loans at December 31, 2021 and September 30, 2021, respectively.

(5) Does not include loans held for sale, and loan balances are before the allowance for loan losses.

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All loans modified due to COVID-19 are separately monitored, and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

At June 30, 2021, only one commercial mortgage loan with a balance of $1.70 million remained on payment deferral status.

At December 31, 2021, there were no loans on deferral status.

For additional information on these loan modifications, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2021 and 2020

Net income increased by $813,000, or 13.1%, to $7.02 million for the quarter ended June 30, 2021 from $6.21 million for the quarter ended June 30, 2020.

Net income per diluted common share increased by $0.09, or 12.2%, to $0.83 for the quarter ended June 30, 2021 from $0.74 for the quarter ended June 30, 2020.

The increases in net income and net income per diluted common share for the three months ended June 30, 2021 were primarily due to a $1.00 million decrease in the provision for loan losses, a $677,000 increase in net interest income, and a $48,000 decrease in non-interest expense, which were partially offset by a $589,000 decrease in non-interest income, and a $323,000 increase in the provision for income taxes.

Net income increased by $3.65 million, or 20.4%, to $21.57 million for the nine months ended June 30, 2021 from $17.91 million for the nine months ended June 30, 2020.

Net income per diluted common share increased by $0.43, or 20.3%, to $2.55 for the nine months ended June 30, 2021 from $2.12 for the nine months ended June 30, 2020.

The increases in net income and net income per diluted common share were primarily due to a $3.20 million decrease in the provision for loan losses, a $1.24 million increase in non-interest income, and a $386,000 increase in net interest income which were partially offset by a $255,000 increase in non-interest expense and a $916,000 increase in the provision for income taxes.

Comparison of Operating Results for the Three Months Ended December 31, 2021 and 2020

Net income decreased by $1.81 million, or 24.8%, to $5.49 million for the quarter ended December 31, 2021 from $7.29 million for the quarter ended December 31, 2020.

Net income per diluted common share decreased by $0.22, or 25.3%, to $0.65 for the quarter ended December 31, 2021 from $0.87 for the quarter ended December 31, 2020.

The decreases in net income and net income per diluted common share for the three months ended December 31, 2021 were primarily due to a $1.12 million decrease in non-interest income, an $854,000 increase in non-interest expenses, and a $328,000 decrease in net interest income.

These decreases were partially offset by a $494,000 decrease in the provision for income taxes.

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

Net Interest Income:

Net interest income increased by $677,000, or 5.4%, to $13.16 million for the quarter ended June 30, 2021 from $12.48 million for the quarter ended June 30, 2020.

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

Total interest and dividend income increased by $197,000, or 1.4%, to $13.87 million for the quarter ended June 30, 2021 from $13.67 million for the quarter ended June 30, 2020, primarily due to an increase in the average balance of interest-earning assets partially offset by a decrease in the average yield on interest-earning assets.

Average total interest-earning assets increased by $260.73 million, or 19.0%, to $1.64 billion for the quarter ended June 30, 2021 from $1.38 billion for the quarter ended June 30, 2020.

Average interest-bearing deposits in banks and CDs increased by $209.35 million, or 75.3%, average investment securities increased by $34.55 million, or 46.0%, and average loans receivable increased by $16.63 million, or 1.6%, between the periods.

During the quarter ended June 30, 2021, the accretion of the purchase accounting fair value discount on loans acquired in the October 2018 acquisition of South Sound Bank ("South Sound Acquisition") increased interest income on loans by $84,000 compared to $170,000 for the quarter ended June 30 , 2020.

Net interest income decreased by $328,000, or 2.5%, to $12.70 million for the quarter ended December 31, 2021 from $13.02 million for the quarter ended December 31, 2020.

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

Total interest and dividend income decreased by $615,000, or 4.4%, to $13.34 million for the quarter ended December 31, 2021 from $13.96 million for the quarter ended December 31, 2020, primarily due to an decrease in the average yield on interest-earning assets partially offset by an increase in the average balance of interest-earning assets.

Average total interest-earning assets increased by $241.07 million, or 16.1%, to $1.74 billion for the quarter ended December 31, 2021 from $1.50 billion for the quarter ended December 31, 2020.

Average investment securities increased by $67.89 million, or 77.0%, average interest-bearing deposits in banks and CDs increased by $205.96 million, or 55.01% and average loans receivable decreased by $32.93 million, or 3.2%, between the periods.

During the quarter ended December 31, 2021, the accretion of the purchase accounting fair value discount on loans acquired in the October 2018 acquisition of South Sound Bank ("South Sound Acquisition") increased interest income on loans by $57,000 compared to $120,000 for the quarter ended December 31, 2020.

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

During the quarter ended June 30, 2021, there was a total of $443,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $177,000 collected for the quarter ended June 30, 2020.

During the quarter ended December 31, 2021, there was a total of $145,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $196,000 collected for the quarter ended December 31, 2020.

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

The average yield on interest-earning assets decreased to 3.39% for the quarter ended June 30, 2021 from 3.97% for the quarter ended June 30, 2020, as market interest rates decreased following the 150 basis point decline 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 June 30, 2021.

The average yield on interest-earning assets decreased to 3.07% for the quarter ended December 31, 2021 from 3.73% for the quarter ended December 31, 2020.

Also impacting the average yield and average interest-earning asset balances during the current quarter 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 quarter ended June 30, 2021, average PPP loans were $118.05 million and the Company recorded $293,000 in interest income and accreted $1.30 million in PPP loan origination fees into income.

At June 30, 2021, PPP deferred loan origination fees of $3.31 million remain to be accreted into interest income during the remaining life of the loans

Total interest expense decreased by $480,000, or 40.4%, to $708,000 for the quarter ended June 30, 2021 from $1.19 million for the quarter ended June 30, 2020.

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

The average cost of interest-bearing liabilities decreased to 0.28% for the quarter ended June 30, 2021 from 0.55% for the quarter ended June 30, 2020.

Average interest-bearing liabilities increased by $146.18 million, or 16.9%, to $1.01 billion for the quarter ended June 30, 2021 from $866.46 million for the quarter ended June 30, 2020, primarily due to increases in the average

balances of savings accounts, NOW checking accounts, and money market accounts partially offset by a decline in the average balance of certificates of deposit accounts.

As a result of these changes, the net interest margin ("NIM") decreased to 3.22% for the quarter ended June 30, 2021 from 3.63% for the quarter ended June 30, 2020.

Net interest income increased by $386,000, or 1.0%, to $38.75 million for the nine months ended June 30, 2021 from $38.36 million for the nine months ended June 30, 2020.

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

Total interest and dividend income decreased by $808,000, or 1.9%, to $41.18 million for the nine months ended June 30, 2021 from $41.99 million for the nine months ended June 30, 2020, primarily due to a decrease in the average yield on interest-earning assets.

The average yield on interest-earning assets decreased to 3.50% for the nine months ended June 30, 2021 from 4.47% for the nine months ended June 30, 2020 as market interest rates decreased following the 150 basis point decline 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 June 30, 2021.

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

Average total interest-earning assets increased by $315.20 million, or 25.2%, to $1.57 billion for the nine months ended June 30, 2021 from $1.25 billion for nine months ended June 30, 2020.

Average interest-bearing deposits in banks and CDs increased by $201.75 million, or 89.2%, average loans receivable increased by $85.91 million, or 9.0%, and average investment securities increased by $27.18 million, or 38.4%, between the periods.

Total interest expense decreased by $1.19 million, or 32.9%, to $2.43 million for the nine months ended June 30, 2021 from $3.63 million for the nine months ended June 30, 2020.

These SBA 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 quarter ended December 31, 2021, average SBA PPP loans were $30.24 million, and the Company recorded $71,000 in interest income and accreted $927,000 million in SBA PPP loan origination fees into income.

For the quarter ended December 31, 2020, average SBA PPP loans were $118.00 million and the Company recorded $295,000 in interest income and accreted $1.14 million in SBA PPP loan origination fees into income.

At December 31, 2021, SBA PPP deferred loan origination fees of $907,000 remain to be accreted into interest income during the remaining life of the loans

Total interest expense decreased by $287,000, or 30.8%, to $646,000 for the quarter ended December 31, 2021 from $933,000 for the quarter ended December 31, 2020.

The average cost of interest-bearing liabilities decreased to 0.34% for the nine months ended June 30, 2021 from 0.60% for the nine months ended June 30, 2020.

Average interest-bearing liabilities increased by $158.99 million, or 19.6%, to $970.83 million for the nine months ended June 30, 2021 from $811.84 million for the nine months ended June 30, 2020, due primarily to increases in the average balances of NOW checking accounts, savings accounts, money market accounts, and borrowings partially offset by a decrease in the average balance of certificates of deposit accounts.

As a result of these changes, the NIM decreased to 3.30% for the nine months ended June 30, 2021 from 4.08% for the nine months ended June 30, 2020.

The average cost of interest-bearing liabilities decreased to 0.24% for the quarter ended December 31, 2021 from 0.40% for the quarter ended December 31, 2020.

Average interest-bearing liabilities increased by $131.68 million, or 14.1%, to $1.07 billion for the quarter ended December 31, 2021 from $934.25 million for the quarter ended December 31, 2020, primarily due to increases in the average balances of savings accounts, NOW checking accounts, and money market accounts partially offset by a decline in the average balance of certificates of deposit accounts.

As a result of these changes, the net interest margin ("NIM") decreased to 2.92% for the quarter ended December 31, 2021 from 3.48% for the quarter ended December 31, 2020.

Average Balances, Interest and Average Yields/Cost

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Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands).

Three Months Ended June 30,

Three Months Ended December 31,

Balance Interest and

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Net interest margin (3) 2.92 % 3.48 %

Ratio of average interest-earning

assets to average interest- bearing liabilities 161.55 % 158.72 %

_______________

(1) Does not include interest on loans on non-accrual status.

Includes loans held for sale.

Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.

(2) Average balances include loans and investment securities on non-accrual status.

(3) Net interest income divided by total average interest-earning assets, annualized.

Nine Months Ended June 30,

Balance Interest and

Dividends Yield/

Balance Interest and

Dividends Yield/

Interest-earning assets:

Loans receivable (1)(2) $ 1,035,733 $ 39,406 5.07 % $ 949,822 $ 38,457 5.40 %

Investment securities (2) 97,857 877 1.19 70,682 1,274 2.40

Dividends from mutual funds, FHLB stock and other investments 5,964 83 1.86 5,600 95 2.27

Interest-bearing deposits in banks and CDs 427,881 816 0.25 226,129 2,164 1.28

Total interest-earning assets 1,567,435 41,182 3.50 1,252,233 41,990 4.47

Non-interest-earning assets 85,636 85,405

$ 1,653,071 $ 1,337,638

Interest-bearing liabilities:

Savings $ 237,456 147 0.08 $ 184,076 141 0.10

Money market 181,115 414 0.31 144,663 580 0.54

NOW checking 396,140 467 0.16 310,717 672 0.29

Certificates of deposit 147,530 1,330 1.21 168,148 2,198 1.75

Short-term borrowings 1 — 0.30 — — —

Long-term borrowings 8,591 76 1.17 4,234 37 1.17

Total interest-bearing liabilities 970,833 2,434 0.34 811,838 3,628 0.60

Non-interest-bearing deposits 476,628 339,460

Other liabilities 10,757 9,823

Total liabilities 1,458,218 1,161,121

Shareholders' equity 194,853 176,517

Total liabilities and

shareholders' equity $ 1,653,071 $ 1,337,638

Net interest income $ 38,748 $ 38,362

Interest rate spread 3.16 % 3.87 %

Net interest margin (3) 3.30 % 4.08 %

Ratio of average interest-earning

assets to average interest-bearing liabilities 161.45 % 154.25 %

Ratio of average interest-earning assets to average interest- bearing liabilities 163.22 % 160.42 %

_______________

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Three months ended

June 30, 2021

December 31, 2021

compared to three months

ended June 30, 2020

increase (decrease) due to Nine months ended

June 30, 2021

compared to nine months

ended June 30, 2020

ended December 31, 2020

increase (decrease) due to

Rate Volume Net

Change Rate Volume Net

Interest-earning assets:

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Interest-bearing deposits in banks and CDs (153) 131 (22)

Total net increase (decrease) in income on interest-earning assets (345) 542 197 (2,217) 1,409 (808)

Total net decrease in income on interest-earning assets (515) (100) (615)

Interest-bearing liabilities:

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FHLB borrowings 1 (15) (14)

Total net increase (decrease) in expense on interest-bearing liabilities (466) (14) (480) (999) (195) (1,194)

Net increase (decrease) in net interest income $ 121 $ 556 $ 677 $ (1,218) $ 1,604 $ 386

Total net decrease in expense on interest-bearing liabilities (278) (9) (287)

Net decrease in net interest income $ (237) $ (91) $ (328)

Provision for Loan Losses:

There was no provision for loan losses for the quarter ended June 30, 2021 compared to a $1.00 million provision for loans losses for the quarter ended June 30, 2020 due primarily to improvement in forecasted probable credit losses from the COVID-19 pandemic on the economy as of June 30, 2021.

For the quarter ended June 30, 2021, there were net recoveries of $35,000 compared to net recoveries of $4,000 for the quarter ended June 30, 2020.

Non-accrual loans decreased by $876,000 or 30.2%, to $2.03 million at June 30, 2021, from $2.91 million at September 30, 2020 and decreased by $986,000, or 32.7%, from $3.02 million at June 30, 2020.

Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $806,000, or 21.5%, to $2.94 million at June 30, 2021, from $3.75 million at September 30, 2020 and decreased by $610,000, or 17.2%, from $3.55 million one year ago.

The $95.63 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at June 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.

There was no provision for loan losses for the nine months ended June 30, 2021 compared to a $3.20 million provision for loan losses for the nine months ended June 30, 2020 due primarily to forecasted probable credit losses reflecting the potential future impact of the COVID-19 pandemic on the economy as of June 30, 2020.

For the nine months ended June 30, 2021, there were net recoveries of $55,000 compared to net recoveries of $4,000 for the nine months ended June 30, 2020.

There was no provision for loan losses for the quarters ended December 31, 2021 and December 31, 2020.

For the quarter ended December 31, 2021, there were net charge offs of $1,000 compared to net recoveries of $18,000 for the quarter ended December 31, 2020.

Non-accrual loans were $2.85 million at December 31, 2021 and September 30, 2021 and increased by $272,000, or 10.5%, from $2.58 million at December 31, 2020.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $197,000, or 6.5%, to $3.24 million at December 31, 2021, from $3.04 million at September 30, 2021 and increased by $414,000, or 14.7%, from $2.82 million one year ago.

The $21.40 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at December 31, 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.

The Company has established a comprehensive methodology for determining the allowance for loan losses.

On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio.

factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses.

These factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses.

Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan.

The aggregate principal impairment reserve amount determined at June 30, 2021 was $171,000 compared to $41,000 at September 30, 2020 and $63,000 at June 30, 2020.

The aggregate principal impairment reserve amount determined at December 31, 2021 was $254,000 compared to $247,000 at September 30, 2021 and $87,000 at December 31, 2020.

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses.

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The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios.

The remaining fair value discount on loans acquired in the South Sound Acquisition was $499,000 at June 30, 2021.

The remaining fair value discount on loans acquired in the South Sound Acquisition was $392,000 at December 31, 2021.

The Company believes that 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 its comprehensive analysis, management believes that the allowance for loan losses of $13.47 million at June 30, 2021 (1.33% of loans receivable and 663.8% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.

The allowance for loan losses was $13.41 million (1.31% of loans receivable and 461.8% of non-performing loans) at September 30, 2020 and $12.89 mil1ion (1.26% of loans receivable and 427.7% of non-performing loans) at June 30, 2020.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $13.47 million at December 31, 2021 (1.34% of loans receivable and 472.1% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.

The allowance for loan losses was $13.47 million (1.37% of loans receivable and 471.9% of non-performing loans) at September 30, 2021 and $13.43 mil1ion (1.32% of loans receivable and 520.4% of non-performing loans) at December 31, 2020.

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 significantly increase its allowance for loan losses.

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Non-interest Income:

Total non-interest income decreased by $589,000, or 12.1%, to $4.27 million for the quarter ended June 30, 2021 from $4.86 million for the quarter ended June 30, 2020.

This decrease was primarily due to a $534,000 decrease in gain on sales of loans, a $201,000 decrease in other non-interest income, a $179,000 increase in the valuation allowance on loan servicing rights, and smaller decreases in several other categories.

These decreases to non-interest income were partially offset by a $294,000 increase in ATM and debit card interchange transaction fees and smaller increases in several other categories.

The decrease in gain on sales of loans was primarily due to a decrease in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter and a decrease in the average pricing margin compared to the same period last year.

The decrease in the other non-interest income category was related to a non-recurring $200,000 recovery (during the quarter ended June 30, 2020) of a previously charged off receivable acquired in the South Sound Acquisition.

The valuation allowance on loan servicing rights was primarily due to an increase in the projected mortgage prepayment speeds as mortgage interest rates decreased during the quarter.

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

Total non-interest income for the nine months ended June 30, 2021 increased by $1.24 million, or 9.9%, to $13.71 million from $12.47 million for the nine months ended June 30, 2020.

This increase was primarily due to a $1.54 million increase in gain on sales of loans, a $577,000 increase in ATM and debit card interchange transaction fees, and smaller increases in several other categories.

These increases were partially offset by a $491,000 decrease in the other non-interest income category, a $193,000 decrease in services 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 period and an increase in the average pricing margin compared to the same period last year.

Total non-interest income decreased by $1.12 million, or 24.5%, to $3.44 million for the quarter ended December 31, 2021 from $4.56 million for the quarter ended December 31, 2020.

This decrease was primarily due to a $1.34 million decrease in net gain on sales of loans, a $142,000 decrease in the service charges on deposits, a $93,000 decrease in other non-interest income, and smaller decreases in several other categories.

These decreases to non-interest income were partially offset by a $355,000 change in the valuation recovery (allowance) of loan servicing rights, a $121,000 increase in ATM and debit card interchange transaction fees and smaller increases in several other categories.

The decrease in net gain on sales of loans was primarily due to a decrease in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter and a decrease in the average pricing margin compared to the same period last year.

The valuation recovery on loan servicing rights was primarily due to an decrease in the projected mortgage prepayment speeds, as mortgage interest rates increased during the quarter.

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 decrease in the other non-interest income category was related to non-recurring recoveries of $483,000 (during the nine months ended June 30, 2020) of previously charged off receivables acquired in the South Sound Acquisition.

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

Non-interest Expense:

Total non-interest expense decreased by $48,000, or 0.6%, to $8.61 million for the quarter ended June 30, 2021 from $8.66 million for the quarter ended June 30, 2020.

This decrease was primarily due to an $82,000 decrease in premises and equipment expense and smaller decreases in several other categories, which were partially offset by smaller increases in several categories.

The efficiency ratio for the current quarter improved to 49.43% from 49.96% for the comparable quarter one year ago.

Total non-interest expense increased by $255,000, or 1.0%, to $25.57 million for the nine months ended June 30, 2021 from $25.32 million for the nine months ended June 30, 2020.

The increase was primarily due to a $185,000 increase in FDIC insurance expense, a $166,000 increase in data processing and telecommunications expense, and smaller increases in several other categories, which were partially offset by a $149,000 improvement in OREO and other repossessed assets expense due primarily to gains on the sale of OREO and smaller decreases in several categories.

The increase in FDIC insurance expense was primarily due to an assessment credit which reduced the expense in the comparable period in 2020.

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

The efficiency ratio for the nine months ended June 30, 2021 improved to 48.75% from 49.81% for the nine months ended June 30, 2020.

Total non-interest expense increased by $854,000, or 10.2%, to $9.26 million for the quarter ended December 31, 2021 from $8.41 million for the quarter ended December 31, 2020.

This increase was primarily due to a $558,000 increase in salaries and employee benefits expense, a $197,000 increase in the other non-interest expense category and smaller increases in several other categories, which were partially offset by smaller decreases in several categories.

The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2021) and the hiring of additional lending personnel.

The increase in the other non-interest category was primarily related to refunds issued to customers for deposit account fees that were determined to have been charged in error after the Bank's core system conversion in 2019.

The Bank discovered this issue during the current quarter.

Bank staff reviewed the affected accounts and refunded all fees charged that were not consistent with the Bank's deposit account disclosures (including all subsequent fees incurred as a result of the fees charged in error).

The efficiency ratio for the current quarter increased to 57.40% from 47.83% for the comparable quarter one year ago.

Provision for Income Taxes:

The provision for income taxes increased by $323,000, or 22.1%, to $1.79 million for the quarter ended June 30, 2021 from $1.46 million for the quarter ended June 30, 2020.

The provision for income tax increased by $916,000, or 20.8%, to $5.32 million for the nine months ended June 30, 2021 from $4.40 million for the nine months ended June 30, 2020.

These increases in the provision for income taxes were primarily due to higher income before income taxes.

The Company's effective income tax rate was 20.27% for the quarter ended June 30, 2021 and 19.06% for the quarter ended June 30, 2020.

The Company's effective tax rate was 19.79% for the nine months ended June 30, 2021 and 19.73% for the nine months ended June 30, 2020.

The provision for income taxes decreased by $494,000, or 26.2%, to $1.39 million for the quarter ended December 31, 2021 from $1.88 million for the quarter ended December 31, 2020.

The decrease in the provision for income taxes was primarily due to lower income before income taxes.

The Company's effective income tax rate was 20.2% for the quarter ended December 31, 2021 and 20.5% for the quarter ended December 31, 2020.

The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed).

While 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.

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

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

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

December 31, 2021, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 42.69%.

At December 31, 2021, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which $5.00 million was outstanding.

The Bank had $401.04 million available for additional borrowings with the FHLB at December 31, 2021.

The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.

At December 31, 2021, the Bank had no outstanding balance on this borrowing line, under which $75.36 million was available for future borrowings.

The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB").

At December 31, 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.

The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits.

Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term investments.

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

At June 30, 2021, the Bank’s regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 38.48%.

The Company’s total cash and cash equivalents and CDs held for investment increased by $154.95 million, or 40.8%, to $534.94 million at June 30, 2021 from $380.00 million at September 30, 2020.

If the Bank requires funds that exceed its ability to generate them internally, it has additional borrowing capacity with the FHLB, the Federal Reserve Bank of San Francisco ("FRB") and Pacific Coast Bankers' Bank ("PCBB").

At June 30, 2021, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral.

At June 30, 2021, the Bank had $5.00 million in FHLB borrowings outstanding and $402.02 million available for additional FHLB borrowings.

Additionally, the Bank maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral.

At June 30, 2021, the Bank had $65.41 million available for borrowings with the FRB and there was no outstanding balance on this borrowing line.

The Bank also maintains a $50.00 million overnight borrowing line with PCBB.

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

The Bank’s primary investing activity is the origination of one- to four-family mortgage loans, commercial mortgage loans, construction loans, consumer loans, and commercial business loans.

At June 30, 2021, the Bank had loan commitments totaling $148.29 million and undisbursed construction loans in process totaling $90.33 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 June 30, 2021 totaled $87.95 million.

Excess liquidity is invested generally in interest-bearing overnight deposits, CDs held for investment and short-term government and agency obligations.

If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, the FRB and PCBB.

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

During the three months ended December 31, 2021 and 2020, the Bank originated $176.60 million and $156.58 million of loans, respectively.

At December 31, 2021, the Bank had loan commitments totaling $143.51 million and undisbursed construction loans in process totaling $106.01 million.

Investment securities purchased during the three months ended December 31, 2021 and 2020 totaled $48.49 million and $10.27 million, respectively.

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

During the three months ended December 31, 2021 and 2020, the Bank sold $22.56 million and $43.84 million, respectively, in loans and loan participation interests.

During the three months ended December 31, 2021, the Bank received $113.41 million in principal repayments.

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

During the three months ended December 31, 2021, deposits increased by $36.08 million from September 30, 2021.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities decreased to $582.98 million at December 31, 2021 from $608.68 million at September 30, 2021.

CDs that are scheduled to mature in less than one year from December 31, 2021 totaled $80.69 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 remaining nine months 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 $0.22 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank, and returning a substantial portion of cash to shareholders.

Assuming continued payment during fiscal year 2022 at the rate of $0.22 per share, the average total dividend paid each quarter would be approximately $1.84 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the remaining nine months ending September 30, 2022, the Bank projects that fixed commitments will include $255,000 of operating lease payments.

There are no scheduled payments and maturities of FHLB borrowings during the fiscal year 2022, but due to favorable borrowing terms, the Company decided in January 2022 that it was advantageous to payoff $5.00 million in FHLB borrowings.

In addition, at December 31, 2021, there were other future obligations and accrued expenses of $6.98 million.

The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses.

Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities.

At December 31, 2021, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $2.54 million.

Capital Resources

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The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Based on its capital levels at June 30, 2021, the Bank exceeded all regulatory capital requirements as of that date.

Based on its capital levels at December 31, 2021, the Bank exceeded all regulatory capital requirements as of that date.

Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC.

Based on capital levels at June 30, 2021, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Based on capital levels at December 31, 2021, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The following table compares the Bank’s actual capital amounts at June 30, 2021 to its minimum regulatory capital requirements at that date (dollars in thousands):

The following table compares the Bank’s actual capital amounts at December 31, 2021 to its minimum regulatory capital requirements at that date (dollars in thousands):

Be “Adequately

9 unchanged sentences

In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions.

At June 30, 2021, the Bank's CET1 capital exceeded the required capital conservation buffer.

At December 31, 2021, the Bank's CET1 capital exceeded the required capital conservation buffer.

Timberland Bancorp, Inc.

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If Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2021, Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2021, Timberland Bancorp, Inc.

would have exceeded all regulatory requirements.

The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc.

as of June 30, 2021 (dollars in thousands):

as of December 31, 2021 (dollars in thousands):

Leverage Capital Ratio:

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Key Financial Ratios and Data

Three Months Ended June 30, Nine Months Ended

2021 2020 2021 2020

Three Months Ended December 31,

PERFORMANCE RATIOS :

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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-Q

Item 2. Management’s Discussion and Analysis