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Item 7. Management’s Discussion and Analysis

2022-12-09 compared with 2021-12-08 · 146 added, 180 removed, 488 unchanged (40% of the section changed)

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Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company.

The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

The information contained in this

section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

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 23 branches (including its main office in Hoquiam).

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

At September 30, 2022, the Company had total assets of $1.86 billion, net loans receivable of $1.13 billion, total deposits of $1.63 billion and total shareholders’ equity of $218.57 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 relates primarily to the Bank’s operations.

On October 1, 2018, the Company completed the South Sound Acquisition.

The operating results for the years ended September 30, 2019, 2020 and 2021 include the operating results produced by the net assets acquired in the South Sound Acquisition.

For additional information on the South Sound Acquisition, see Note 2 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

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.

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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 the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).

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

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

Since March 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third calendar calendar quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022.

In November 2022, the FOMC increased the target range for the federal funds rate another 75 basis points to a range of 3.75% to 4.00%.

We believe our balance sheet is structured to enhance our average yield on interest-earning assets as the lagging benefit of variable rate interest-earnings assets beginning to reprice occurs as well as a higher net interest margin if the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent Federal Reserve communications and interest rate forecasts.

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 year ended September 30, 2021, primarily reflecting the improving economy and the resulting decline in forecasted probable loan losses from COVID-19 during this fiscal year.

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

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

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

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

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.

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

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

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

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

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

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

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

The Company recorded a provision for loan losses of $270,000 for the year ended September 30, 2022, primarily due to increased loan portfolio growth.

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

For the year ended September 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, escrow fee and other operating income.

For the year ended September 30, 2022, 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, escrow fees 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, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses and other non-interest expenses.

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

Non-interest expense in certain periods are reduced by gains on the sale of premises and equipment and by gains on the sale of OREO.

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

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

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

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

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Continue generating revenues through mortgage banking operations.

The substantial majority of the fixed-rate residential mortgage loans we originate are sold into the secondary market with servicing retained.

The majority of the fixed-rate residential mortgage loans we originate have historically been sold into the secondary market with servicing retained.

This strategy produces gains on the sale of such loans and reduces the interest rate and credit risk associated with fixed-rate residential lending.

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

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

Although the Company plans to continue to place emphasis on certain

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

Selected Financial Data

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Loans receivable, net 1,132,426 968,454 1,013,875 886,662 725,391

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

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

Investment securities held-to-maturity 266,608 69,102 27,890 31,102 12,810

Investment securities available-for-sale 41,415 63,176 57,907 22,532 1,154

FHLB stock 2,194 2,103 1,922 1,437 1,190

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

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

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

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

Cash and due from financial institutions and interest-bearing deposits in banks 316,755 580,196 314,452 143,015 148,864

Certificate of deposits held for investments 22,894 28,482 65,545 78,346 63,290

BOLI 22,806 22,193 21,593 21,005 19,813

OREO and other repossessed assets — 157 1,050 1,683 1,913

Deposits 1,632,176 1,570,555 1,358,406 1,067,227 889,506

FHLB advances 5,000 10,000 — — —

FHLB borrowings — 5,000 10,000 — —

Shareholders' equity 218,569 206,899 187,630 171,067 124,657

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Non-interest expense 38,626 34,591 34,063 35,580 29,177

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

Provision for state income taxes — — — — —

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

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

Net income (loss) per common share:

Income before income taxes 29,562 34,428 30,307 29,921 22,422

Provision for federal income taxes 5,962 6,845 6,038 5,901 5,701

Net income $ 23,600 $ 27,583 $ 24,269 $ 24,020 $ 16,721

Net income per common share:

Basic $ 2.84 $ 3.31 $ 2.91 $ 2.89 $ 2.28

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Performance Ratios:

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

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

Return on average assets (1) 1.27 % 1.64 % 1.75 % 1.96 % 1.70 %

Return on average equity (2) 11.14 13.98 13.59 14.91 14.27

Interest rate spread (3) 3.07 3.13 3.70 4.31 4.10

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

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

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

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

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

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

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

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

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

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

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

The level of general reserves is based on an analysis of potential exposures

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

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

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

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

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

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

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

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

There were no

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

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

Financial Statements..

Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company's common stock in a business

combination and the Company chooses to record these acquisition-related costs through stockholders' equity.

There were no business combinations during the years ended September 30, 2022, 2021 and 2020, respectively.

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

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Quantitative Aspects of Market Risk.

The model provided for the Bank by NXTsoft estimates the changes in net portfolio value ("NPV") and net interest income in response to a range of assumed changes in market interest rates.

The model first estimates the level of the Bank's NPV (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment.

The model provided for the Bank by NXTsoft estimates the changes in the economic value of equity ("EVE") and net interest income in response to a range of assumed changes in market interest rates.

The model first estimates the level of the Bank's EVE (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment.

In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates.

The model then recalculates the Bank's NPV under different interest rate scenarios.

The change in NPV under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk.

The model then recalculates the Bank's EVE under different interest rate scenarios.

The change in EVE under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk.

The following table is provided by NXTsoft based on data at September 30, 2022:

Hypothetical Net Interest Income (1)(2) Current Market Value

Interest Rate Estimated $ Change % Change Estimated $ Change % Change

Scenario (3) Value from Base from Base Value from Base from Base

Hypothetical Net Interest Income (1)(2) Economic Value of Equity

Interest Rate $ Change % Change $ Change % Change

Scenario (3) from Base from Base from Base from Base

(Basis Points) (Dollars in thousands)

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+100 2,301 3.19 7,767 1.92

BASE 43,750 — — 303,509 — —

-100 (4,528) (6.28) (18,419) (4.56)

-200 (10,187) (14.12) (44,148) (10.94)

-300 (15,750) (21.84) (72,546) (17.97)

(1) Does not include loan fees.

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Furthermore, the computations do not reflect any actions management may undertake in response to changes in interest rates.

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

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

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

In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 4.56% decrease in EVE and a 6.28% decrease in net interest income.

In the event of a 100 basis point increase in interest rates, a 1.92% increase in EVE and a 3.19% increase in net interest income would be expected.

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

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table.

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The Company's total assets increased by $68.33 million, or 3.8%, to $1.86 billion at September 30, 2022 from $1.79 billion at September 30, 2021.

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

The increase in assets was primarily due to an increase in held to maturity investment securities

and an increase in net loans receivable.

These increases were partially offset by a decrease in total cash and cash equivalents.

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

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

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

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

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

Net loans receivable increased by $163.97 million, or 16.9%, to $1.13 billion at September 30, 2022 from $968.45 million at September 30, 2021, primarily due to increases in commercial real estate loans, one- to four-family loans, commercial business loans and smaller increases in several other loan categories.

These increases to net loans receivable were partially offset by decreases in SBA PPP loans and an increase in the undisbursed portion of construction loans in process.

Total deposits increased by $61.62 million, or 3.9%, to $1.63 billion at September 30, 2022 from $1.57 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 certificates of deposit account balances and non-interest bearing demand account balances.

Shareholders' equity increased by $11.67 million, or 5.6%, to $218.57 million at September 30, 2022 from $206.90 million at September 30, 2021.

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

The increase was primarily due to net income for the year ended September 30, 2022 of $23.60 million which was partially offset by $7.23 million in dividends paid to shareholders and the repurchase of 170,237 shares of common stock for $4.58 million.

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

Cash and Cash Equivalents:

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

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

CDs Held for Investment:

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

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

Investment Securities and Investments in Equity Securities:

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

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

Cash and Cash Equivalents and CDs Held for Investment:

Cash and cash equivalents and CDs held for investment decreased by $269.03 million, or 44.2%, to $339.65 million at September 30, 2022 from $608.68 million at September 30, 2021.

The decrease was primarily due to the purchase of additional held to maturity investment securities and the funding of loan portfolio growth.

Investment Securities:

Investment securities (including investments in equity securities) increased by $175.63 million, or 131.8%, to $308.86 million at September 30, 2022 from $133.23 million at September 30, 2021.

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

Treasury and U.S.

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

government agency investment securities, U.S.

government agency mortgage-backed investment securities and private label mortgage-backed investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the year ended September 30, 2022.

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

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Loans Held for Sale:

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

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

Loans held for sale decreased by $2.47 million, or 76.8%, to $748,000 at September 30, 2022 from $3.22 million at September 30, 2021, primarily due to the timing and volume of mortgage banking loan sales.

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

The Company sold $73.50 million in loans during the year ended September 30, 2022 compared to $150.20 million for the year ended September 30, 2021.

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

Sales of loans over the past year has decreased, primarily due to decreased refinance activity for one- to four-family loans due to the increase in mortgage interest rates.

Loans Receivable, Net of Allowance for Loan Losses:

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

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

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

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

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

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

Net loans receivable increased by $163.97 million, or 16.9%, to $1.13 billion at September 30, 2022 from $968.45 million at September 30, 2021.

The increase was primarily due to a $66.00 million increase in commercial real estate loans, a $56.18 million increase in one- to four-family mortgage loans, a $50.46 million increase in commercial business loans and smaller increases in several other loan categories.

These increases were partially offset by a $39.92 million decrease in SBA PPP loans, and smaller decreases 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.

Loan originations (excluding SBA PPP loans) increased by $35.01 million, or 6.5%, to $572.46 million for the year ended September 30, 2022 from $537.45 million for the year ended September 30, 2021.

The increase in loan originations was primarily due to increases in commercial real estate, construction and commercial business loans.

These increases were

partially offset by a decrease in originations of one- to four-family loans and SBA PPP loans.

For additional information on loans, see "Item 1.

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OREO and Other Repossessed Assets:

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

OREO and other repossessed assets decreased by $157,000, or 100.0%, to $0 at September 30, 2022 from $157,000 at September 30, 2021.

The decrease was primarily due to the sales of $157,000 in OREO properties.

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

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

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Financial Statements and Supplementary Data."

CDI decreased by $361,000, or 22.2% to $1.26 million at September 30, 2021 from $1.63 million at September 30, 2020 due to scheduled amortization.

CDI decreased by $316,000, or 25.0% to $948,000 at September 30, 2022 from $1.26 million at September 30, 2021 due to scheduled amortization.

For additional information on CDI, see Note 7 to the Consolidated Financial Statements contained in "Item 8.

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Loan Servicing Rights, Net:

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

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

Loan servicing rights decreased by $459,000, or 13.2%, to $3.02 million at September 30, 2022 from $3.48 million at September 30, 2021, primarily due to the amortization of servicing rights, partially offset by additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained, and a $119,000 valuation recovery reflecting decreased prepayment speeds due to rising market interest rates.

The principal amount of loans serviced for Freddie Mac and the SBA decreased by $16.15 million to $410.29 million at September 30, 2022 from $426.44 million at September 30, 2021.

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

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Operating lease ROU assets decreased by $303,000, or 13.3%, to $1.98 million at September 30, 2022 from $2.28 million at September 30, 2021, primarily due to the amortization of the ROU assets.

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

The operating lease ROU assets at September 30, 2022 represented the present value of two operating leases on branch facilities.

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

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Other Assets:

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

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

Other assets increased by $491,000, or 17.1%, to $3.36 million at September 30, 2022 from $2.87 million at September 30, 2021.

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

Deposits increased by $61.62 million, or 3.9%, to $1.63 billion at September 30, 2022 from $1.57 billion at September 30, 2021.

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

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

The increase in deposits was primarily driven by proceeds from SBA PPP loans and government stimulus checks deposited directly into customer accounts, organic growth in customer relationships and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.

The increase consisted of a $38.11 million increase in money market account balances, a $22.53 million increase in savings account balances, and a $17.68 million increase in NOW checking account balances.

These increases were partially offset by a $11.55 million decrease in certificates of deposit account balances and a $5.15 million decrease in non-interest checking account balances.

The increase in deposits was primarily driven by organic growth in customer relationships.

For additional information on deposits, see "Item 1.

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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 September 30, 2021 from $10.00 million at September 30, 2020.

At September 30, 2021, FHLB borrowings

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

At September 30, 2022, the Company had a borrowing capacity of $492.29 million.

The Company had no FHLB borrowings at September 30, 2022 compared to $5.00 million at September 30, 2021.

At September 30, 2021, FHLB borrowings consisted of a single $5.00

million borrowing, with a scheduled maturity in March 2025.

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

For additional information on FHLB borrowings, see Note 11 to the Consolidated Financial Statements contained in "Item 8.

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Operating lease liabilities decreased by $293,000, or 12.4%, to $2.07 million at September 30, 2022 from $2.36 million at September 30, 2021, primarily due to required annual lease payments.

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

The operating lease liability at September 30, 2022 represented the present value of two operating leases on branch facilities.

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

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Total shareholders' equity increased by $11.67 million, or 5.6%, to $218.57 million at September 30, 2022 from $206.90 million at September 30, 2021.

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

The increase was primarily due to net income of $23.60 million for the year ended September 30, 2022, which was partially offset by the payment of $7.23 million in dividends to common shareholders and the repurchase of 170,237 shares of the Company's common stock for $4.58 million during the year ended September 30, 2022.

In addition, shareholder’s equity was adversely impacted by unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $717,000 accumulated other comprehensive loss, net of tax at September 30, 2022.

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

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Comparison of Operating Results for the Years Ended September 30, 2022 and 2021

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

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

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

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

Net income for the year ended September 30, 2022 decreased by $3.98 million, or 14.4%, to $23.60 million from $27.58 million for the year ended September 30, 2021.

Net income per diluted common share decreased by $0.45, or 13.8%, to $2.82 for the year ended September 30, 2022 from $3.27 for the year ended September 30, 2021.

The decrease in net income was primarily due to a $4.54 million decrease in non-interest income and a $4.04 million increase in non-interest expense, partially offset by a $3.98 million increase in net interest income and an $883,000 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 $976,000, or 1.9%, to $51.86 million for the year ended September 30, 2021 from $50.88 million for the year ended September 30, 2020.

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

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

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

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

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

Net interest income increased by $3.98 million, or 7.7%, to $55.83 million for the year ended September 30, 2022 from $51.86 million for the year ended September 30, 2021.

The increase in net interest income was primarily due to increases in the average balances of investment securities and loans receivable and in the average yield on interest-bearing deposits in banks and CDs, and a decline in the average cost of interest-bearing liabilities.

This increase was partially offset by a decrease in the average yield on loans receivable due to a significant decrease in SBA PPP loan origination fees recognized as the volume of forgiven SBA PPP loans declined between the years.

Total interest and dividend income increased by $3.55 million, or 6.5%, to $58.51 million for the year ended September 30, 2022 from $54.96 million for the year ended September 30, 2021, primarily due to an increase in the average balance of interest-earning assets.

The average yield on interest-earning assets decreased to 3.31% for the year ended September 30, 2022 from 3.45% for the year ended September 30, 2021.

Average total interest-earning assets increased by $173.46 million, or 10.87%, to $1.77 billion for the year ended September 30, 2022 from $1.60 billion for the year ended September 30, 2021.

Interest income on loans receivable and loans held for sale increased by $1.19 million, or 2.3%, to $52.54 million for the year ended September 30, 2021 from $51.34 million for the year ended September 30, 2020, primarily due to a $56.34 million increase in the average balance of loans receivable during the current year.

This increase was partially offset by a decrease in the average yield on loans receivable to 5.12% for the year ended September 30, 2021 from 5.29% for the year ended September 30, 2020.

Interest income on loans receivable and loans held for sale decreased by $1.22 million, or 2.3%, to $51.32 million for the year ended September 30, 2022 from $52.54 million for the year ended September 30, 2021, primarily due to a decrease in the average yield on loans receivable to 4.86% for the year ended September 30, 2022 from 5.12% for the year ended September 30, 2021.

This decrease was partially offset by a $28.89 million increase in the average balance of loans receivable during the current year.

During the year ended September 30, 2022, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $182,000 compared to $340,000 for the year ended September 30, 2021.

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

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

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

The accretion of the net fair value discount on acquired loans increased the average yield on loans by two basis points for the year ended September 30, 2022 and three basis points for the year ended September 30, 2021.

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

The remaining net discount on these acquired loans was $267,000 at September 30, 2022.

During the year ended September 30, 2022, a total of $629,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $942,000 for the year ended September 30, 2021.

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

Also impacting the average yield and average interest-earning asset balances during the years ended September 30, 2022 and 2021 were SBA PPP loans.

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

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

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

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

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

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

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

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

For the year ended September 30, 2022, average PPP loans were $11.72 million, and the Company recorded $114,000 in interest income and accreted $1.79 million in PPP loan origination fees into income compared to average PPP loans of $107.00 million, $1.06 million in interest income and $5.07 million in PPP loan origination fees for the year ended September 30, 2021.

At September 30, 2022, the Company had $42,000 in PPP deferred loan origination fees, which will be accreted into interest income over the remaining life of the PPP loans.

Interest income on investment securities increased by $2.29 million, or 191.9%, to $3.49 million for the year ended September 30, 2022 from $1.20 million for the year ended September 30, 2021, primarily due to an increase in the average balance of held to maturity investment securities and an increase in the average yield on investment securities.

Interest income on interest-bearing deposits in banks and CDs increased by $2.46 million, or 220.1%, to $3.58 million for the year ended September 30, 2022 from $1.12 million for the year ended September 30, 2021, primarily due to an increase in the average yield to 0.74% from 0.24% due to market interest rates increasing and to a much lesser extent an increase in the average balance of interest-bearing deposits in banks and CDs.

Total interest expense decreased by $430,000, or 13.9%, to $2.67 million for the year ended September 30, 2022 from $3.10 million for the year ended September 30, 2021.

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

The average cost of interest-bearing liabilities decreased to 0.24% for the year ended September 30, 2022 from 0.32% for the year ended September 30, 2021 as market interest rates for deposits decreased.

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

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

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

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

Average interest-bearing deposits increased by $122.85 million, or 12.6%, to $1.10 billion for the year ended September 30, 2022 from $976.52 million for the year ended September 30, 2021 due primarily to a decline in the average cost and balance of certificates of deposit.

The average balance of interest-bearing deposits increased, however, interest expense on deposits decreased by $356,000 as a result of the decrease in the average cost of interest-bearing deposits

As a result if these changes, the net interest margin decreased nine basis points to 3.16% for the year ended September 30, 2022 from 3.25% for the year ended September 30, 2021.

Provision for Loan Losses:

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

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

and global economies.

The Company had net recoveries of $55,000 for the year ended September 30, 2021 and net recoveries of $24,000 for the year ended September 30, 2020.

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

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

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

There was a $270,000 provision for loans losses for the year ended September 30, 2022 primarily due to loan portfolio growth.

There was no provision for loan losses for the year ended September 30, 2021 due primarily to improvement in forecasted probable credit losses from the COVID-19 pandemic on the economy as of that date.

The Company had net charge-offs of $36,000 for the year ended September 30, 2022 and net recoveries of $55,000 for the year ended September 30, 2021.

The net charge-offs (recoveries) to average outstanding loans ratio was 0.0% for the year ended September 30, 2022 and 2021.

The level of delinquent loans (loans 30 or more days past due) decreased by $943,000, or 31.0%, to $2.10 million at September 30, 2022 from $3.04 million at September 30, 2021 and the level of loans graded substandard increased by $3.78 million, or 105.0%, to $7.39 million at September 30, 2022 from $3.60 million at September 30, 2021.

Special mention loans decreased by $4.78 million or 95.3%, to $237,000 at September 30, 2022 from $5.01 million at September 30, 2021.

Non-accrual loans decreased by $795,000, or 21.8%, to $2.06 million at September 30, 2022 from $2.85 million at September 30, 2021.

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

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

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

The $1.00 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at September 30, 2022, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

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The aggregate principal impairment amount determined at September 30, 2022 was $127,000 compared to $247,000 at September 30, 2021.

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 loans' contractual amounts, of which a portion reflects a discount for possible credit losses.

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 $449,000 at September 30, 2021.

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

Based on the comprehensive methodology, management believes that the allowance for loan losses of $13.70 million at September 30, 2022 (1.20% of loans receivable and 665.52% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.

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

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

Any material increase in the allowance for loan losses would adversely affect the Company's financial condition and results of operations.

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 further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, and any governmental or societal responses to the COVID-19 pandemic, among other factors, could result in a material increase in the allowance for loan losses which would adversely affect the Company's financial condition and results of operations.

For additional information, see "Item 1.

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Non-interest Income:

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

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

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

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

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

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

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

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

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

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

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

Total non-interest income decreased by $4.54 million, or 26.4%, to $12.62 million for the year ended September 30, 2022 from $17.16 million for the year ended September 30, 2021.

The decrease was primarily due to a $4.39 million reduction in gain on sales of loans and smaller decreases in other categories.

These decreases were partially offset by a $126,000 increase in ATM and debit card interchange transaction fees, and smaller increases in other categories.

The decrease in gain on sales of loans was primarily due to decreases in the dollar amount of fixed-rate one-to four-family loans originated and sold (as refinance activity for single family homes slowed due to higher mortgage interest rates) and in the average pricing margin compared to fiscal 2021.

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

Non-interest Expense:

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

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

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

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

annual salary adjustments.

Total non-interest expense increased by $4.04 million, or 11.7%, to $38.63 million for the year ended September 30, 2022 from $34.59 million for the year ended September 30, 2021.

The increase was primarily due to a $2.07 million increase in salaries and employee benefits expense, a $741,000 increase in professional fees expense, a $209,000 increase in data processing and telecommunications expense, a $144,000 increase in deposit operations expense, and smaller increases in several other expense categories.

These increases were partially offset by a $193,000 decrease in premises and equipment expense primarily due to a reduction in depreciation expense.

The increase in salaries and employee benefits expense was primarily due to annual salary adjustments.

The increase in professional fees expense was due to higher legal and consulting fees.

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

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

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

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

The increase in deposit operations expense was primarily due to increased fraud expense and unrecovered overdrafts.

The efficiency ratio for the year ended September 30, 2022 was 56.42% compared to 50.12% for the year ended September 30, 2021.

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

Provision for Income Taxes:

The provision for income taxes increased by $807,000, or 13.4% to $6.85 million for the year ended September 30, 2021 from $6.04 million for the year ended September 30, 2020.

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

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

The provision for income taxes decreased by $883,000, or 12.9% to $5.96 million for the year ended September 30, 2022 from $6.85 million for the year ended September 30, 2021.

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 year ended September 30, 2022 and 19.9% for the 2021 fiscal year.

For additional information on income taxes, see Note 13 of the Consolidated Financial Statements contained in "Item 8.

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Interest-bearing liabilities:

Savings accounts $ 242,598 201 0.08 $ 191,618 188 0.10 $ 162,266 106 0.07

Money market accounts 186,489 560 0.30 148,506 735 0.49 154,375 1,119 0.72

NOW checking accounts $ 449,574 $ 650 0.14 % $ 402,430 $ 605 0.15 % $ 323,261 $ 882 0.27 %

Money market accounts 244,498 766 0.31 186,489 560 0.30 148,506 735 0.49

Savings accounts 278,025 230 0.08 242,598 201 0.08 191,618 188 0.10

Certificates of deposit accounts 127,277 1,011 0.79 145,006 1,647 1.14 166,524 2,830 1.70

Short-term borrowings 3 — — — — — — — —

Long-term borrowings (3) 1,427 17 1.19 7,686 91 1.18 5,685 66 1.16

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At September 30, 2022, 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 32.1%.

At September 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, under which $5.00 million was outstanding.

The Bank had $391.21 million available for additional borrowings with the FHLB at September 30, 2021.

At September 30, 2022, the Bank maintained an unused 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 no balance was outstanding.

The Bank had $492.29 million available for borrowings with the FHLB at September 30, 2022.

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

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At September 30, 2022, 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.

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

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

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

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During the years ended September 30, 2022, 2021 and 2020, deposits increased by $61.62 million, $212.15 million and $290.18 million, respectively.

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

Our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale decreased to $381.06 million at September 30, 2022 from $671.85 million at September 30, 2021 due to the purchase of higher yield investment securities during the year.

CDs that are scheduled to mature in less than one year from September 30, 2022 totaled $76.31 million.

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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.

Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment.

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

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

Assuming continued payment during fiscal year 2023 at this rate of $0.22 per share, the average total dividend paid each quarter would be approximately $1.81 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the fiscal year ending September 30, 2023, the Bank projects that fixed commitments will include $310,000 of operating lease payments.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis