TIMBERLAND BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. 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 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. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: 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; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by 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, 35 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; the impact of the Dodd Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; 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 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; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; 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; 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 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. Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management’s beliefs and assumptions at the time that they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal year 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance. Overview Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 offices (including its main office in Hoquiam). At 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. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank's operations. The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans. The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities. 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 36 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 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. 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. 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 employees who must work on-site. 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. 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. The CARES Act also authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program ("PPP"). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans in April 2020 and originated $127.54 million in PPP loans 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 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 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. 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, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses. Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts. Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities. Critical Accounting Policies and Estimates The Company has identified several accounting 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. Critical accounting policies and estimates are discussed in the Company’s 2021 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2021 Form 10-K. 37 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 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 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 $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 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 : 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 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. Loans: 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 38 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 $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 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 $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 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: 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 Non-interest-bearing demand $ 523,518 32.5 % $ 535,212 34.1 % NOW checking 459,079 28.5 430,097 27.4 Savings 269,423 16.8 260,689 16.6 Money market 211,837 13.2 199,045 12.7 Money market - reciprocal 10,619 0.7 11,383 0.7 Certificates of deposit under $250 110,168 6.9 112,348 7.1 Certificates of deposit $250 and over 21,987 1.4 21,781 1.4 Total $ 1,606,631 100.0 % $ 1,570,555 100.0 % FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings 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 $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 0.17% 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. 39 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): December 31, 2021 September 30, 2021 Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family (1) $ 582 $ 407 Commercial 675 773 Land 676 683 Consumer loans: Home equity and second mortgage 456 516 Other 5 17 Commercial business loans 459 458 Total loans accounted for on a non-accrual basis 2,853 2,854 Accruing loans which are contractually past due 90 days or more — — Total of non-accrual and 90 days past due loans 2,853 2,854 Non-accrual investment securities 140 159 OREO and other repossessed assets, net (2) 157 157 Total non-performing assets (3) $ 3,150 $ 3,170 TDRs on accrual status (4) $ 2,361 $ 2,371 Non-accrual and 90 days or more past due loans as a percentage of loans receivable 0.28 % 0.29 % Non-accrual and 90 days or more past due loans as a percentage of total assets 0.16 % 0.16 % Non-performing assets as a percentage of total assets 0.17 % 0.18 % Loans receivable (5) $ 1,007,475 $ 981,923 Total assets $ 1,831,275 $ 1,792,180 ___________________________________ (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 $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. The Company received inquiries and requests from borrowers for some type of payment relief due to the COVID 19-pandemic. In response, the Company made payment deferral modifications (typically 90-day payment deferral with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. 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 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." 40 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 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 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 3.07% 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 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 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 0.24% 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. 41 Average Balances, Interest and Average Yields/Cost The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands). Three Months Ended December 31, 2021 2020 Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost Interest-earning assets: Loans receivable (1)(2) $ 997,358 $ 12,622 5.06 % $ 1,030,289 $ 13,318 5.17 % Investment securities (2) 156,023 405 1.04 88,137 301 1.37 Dividends from mutual funds, FHLB stock and other investments 6,054 27 1.78 5,896 28 1.90 Interest-bearing deposits in banks and CDs 580,337 288 0.20 374,376 310 0.33 Total interest-earning assets 1,739,772 13,342 3.07 1,498,698 13,957 3.73 Non-interest-earning assets 83,563 84,077 Total assets $ 1,823,335 $ 1,582,775 Interest-bearing liabilities: Savings $ 264,651 55 0.08 $ 222,866 47 0.08 Money market 222,945 163 0.29 168,503 139 0.33 NOW checking 440,744 139 0.13 377,760 177 0.19 Certificates of deposit 132,590 274 0.82 155,125 541 1.38 Long-term borrowings 5,000 15 1.19 10,000 29 1.15 Total interest-bearing liabilities 1,065,930 646 0.24 934,254 933 0.40 Non-interest-bearing deposits 538,865 448,350 Other liabilities 10,566 10,687 Total liabilities 1,615,361 1,393,291 Shareholders' equity 207,974 189,484 Total liabilities and shareholders' equity $ 1,823,335 $ 1,582,775 Net interest income $ 12,696 $ 13,024 Interest rate spread 2.83 % 3.33 % Net interest margin (3) 2.92 % 3.48 % Ratio of average interest-earning assets to average interest- bearing liabilities 163.22 % 160.42 % _______________ (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. 42 Rate Volume Analysis The following table sets forth the effects of changing rates and volumes on the net interest income of the Company. Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns). Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands). Three months ended December 31, 2021 compared to three months ended December 31, 2020 increase (decrease) due to Rate Volume Net Change Interest-earning assets: Loans receivable and loans held for sale $ (275) $ (421) $ (696) Investment securities (85) 189 104 Dividends from mutual funds, FHLB stock and other investments (2) 1 (1) Interest-bearing deposits in banks and CDs (153) 131 (22) Total net decrease in income on interest-earning assets (515) (100) (615) Interest-bearing liabilities: Savings (1) 9 8 Money market (17) 41 24 NOW checking (65) 27 (38) Certificates of deposit (196) (71) (267) FHLB borrowings 1 (15) (14) 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 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. 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 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. 43 Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. 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 $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 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. 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. A decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.” Non-interest Income: Total non-interest income 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. Non-interest Expense: 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 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. Liquidity The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed). While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At 44 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, 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. 45 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 The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. 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 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 December 31, 2021 to its minimum regulatory capital requirements at that date (dollars in thousands): Actual Regulatory Minimum To Be “Adequately Capitalized” To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Leverage Capital Ratio: Tier 1 capital $192,340 10.64 % $72,336 4.00 % $90,420 5.00 % Risk-based Capital Ratios: Common equity tier 1 capital 192,340 19.93 43,425 4.50 62,725 6.50 Tier 1 capital 192,340 19.93 57,900 6.00 77,200 8.00 Total capital 204,424 21.18 77,200 8.00 96,500 10.00 In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum 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 December 31, 2021, the Bank's CET1 capital exceeded the required capital conservation buffer. Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets (as of June 30th of the preceding year), the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at 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 December 31, 2021 (dollars in thousands): 46 Actual Amount Ratio Leverage Capital Ratio: Tier 1 capital $195,468 10.81 % Risk-based Capital Ratios: Common equity tier 1 capital 195,468 20.24 Tier 1 capital 195,468 20.24 Total capital 207,564 21.49 Key Financial Ratios and Data Three Months Ended December 31, 2021 2020 PERFORMANCE RATIOS : Return on average assets 1.20 % 1.84 % Return on average equity 10.55 % 15.39 % Net interest margin 2.92 % 3.48 % Efficiency ratio 57.40 % 47.83 % Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in information concerning market risk from the information provided in the Company’s Form 10-K for the fiscal year ended September 30, 2021.