What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-08 compared with 2022-08-05 · 153 added, 232 removed, 235 unchanged (62% of the section changed)

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

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2022.

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, 2022.

Special Note Regarding Forward-Looking Statements

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

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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

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, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions;

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, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new variants of the novel coronavirus disease 2019 ("COVID-19");

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 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 transition away from LIBOR toward new interest rate benchmarks;

transition away from the London Interbank Offered Rate ("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, 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;

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 banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules and including changes as a result of COVID-19;

our ability to attract and retain deposits;

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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;

difficulties in reducing risks associated with the loans in 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;

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our ability to pay dividends on our common stock;

adverse changes in the securities markets;

the quality and composition of our securities portfolio and the impact if any adverse changes in the securities markets, including on market liquidity;

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 (including the Russia/Ukraine conflict) or any terrorist activities;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

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.

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

the economic impact of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism.

and other external events on our business;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services 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 2022 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.

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The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 offices (including its main office in Hoquiam).

At June 30, 2022, the Company had total assets of $1.89 billion, net loans receivable of $1.09 billion, total deposits of $1.66 billion and total shareholders’ equity of $214.32 million.

At December 31, 2022, the Company had total assets of $1.84 billion, net loans receivable of $1.17 billion, total deposits of $1.60 billion and total shareholders’ equity of $223.55 million.

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

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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.

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.

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 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022.

As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are expected during calendar 2023.

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 and nine months ended June 30, 2022 and 2021, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during these periods.

The Company recorded a $525,000 provision for loan losses for the three months ended December 31, 2022 primarily due to loan portfolio growth.

There was no provision for loan losses for the three months ended December 31, 2021.

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

For the three and nine months ended June 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, servicing income on loans sold and other operating income.

For the three months ended December 31, 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, servicing income on loans sold and other operating income.

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

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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 also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities, including changes resulting from the COVID-19 pandemic and the government action taken to address it.

COVID-19 Impact to the Company

The Company is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic.

The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers.

As of June 30, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Critical Accounting Policies and Estimates

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There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2022 Form 10-K.

Comparison of Financial Condition at June 30, 2022 and September 30, 2021

The Company’s total assets increased by $95.62 million, or 5.3%, to $1.89 billion at June 30, 2022 from $1.79 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.

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

Net loans receivable increased by $119.51 million, or 12.3%, to $1.09 billion at June 30, 2022 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 smaller increases 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 $93.56 million, or 6.0%, to $1.66 billion at June 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 non-interest bearing account balances and in certificates of deposit account balances.

Shareholders’ equity increased by $7.42 million, or 3.6%, to $214.32 million at June 30, 2022 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.

Comparison of Financial Condition at December 31, 2022 and September 30, 2022

The Company’s total assets decreased by $24.96 million, or 1.3%, to $1.84 billion at December 31, 2022 from $1.86 billion at September 30, 2022.

The decrease in total assets was primarily due to a decrease in total cash and cash equivalents, which was partially offset by increases in loans receivable and investment securities.

Cash and cash equivalents were also used to fund the decrease in total deposits.

Net loans receivable increased by $40.13 million, or 3.5%, to $1.17 billion at December 31, 2022 from $1.13 billion at September 30, 2022, primarily due to increases in one- to four-family loans, multi-family construction loans, commercial real estate loans and smaller increases in several other loan categories.

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

Total deposits decreased by $31.09 million, or 1.9%, to $1.60 billion at December 31, 2022 from $1.63 billion at September 30, 2022, primarily due to decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances.

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

Shareholders’ equity increased by $4.98 million, or 2.3%, to $223.55 million at December 31, 2022 from $218.57 million at September 30, 2022.

The increase in shareholders' equity was due to net income and proceeds from stock options exercised and was 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 $162.64 million, or 26.7%, to $446.04 million at June 30, 2022 from $608.68 million at September 30, 2021.

The decrease was primarily a result of deploying overnight liquidity into higher-earning loan originations and held to maturity investment securities.

Cash and cash equivalents and CDs held for investment decreased by $91.36 million, or 26.9%, to $248.29 million at December 31, 2022 from $339.65 million at September 30, 2022.

The decrease was primarily a result of deploying overnight liquidity into higher-earning loan originations and investment securities, as well as to fund deposit withdrawals.

Investment Securities:

Investment securities (including investments in equity securities) increased by $140.98 million, or 105.8%, to $274.21 million at June 30, 2022 from $133.23 million at September 30, 2021.

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

Treasury and U.S.

government agency securities and to a lesser extent mortgage-backed investment securities during the nine months ended June 30, 2022, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

Investment securities (including investments in equity securities) increased by $26.41 million, or 8.6%, to $335.26 million at December 31, 2022 from $308.86 million at September 30, 2022.

This increase was primarily due to the purchase of additional U.S.

government agency securities and mortgage-backed investment securities during the three months ended December 31, 2022, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

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

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

FHLB stock increased $91,000, or 4.3% to $2.19 million at June 30, 2022 from $2.10 million at September 30, 2021, due to purchases required by the FHLB due to the increase in total assets.

FHLB stock was $2.19 million at December 31, 2022 and September 30, 2022.

Other Investments:

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both June 30, 2022 and September 30, 2021.

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, 2022 and September 30, 2022.

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

Net loans receivable increased by $119.51 million, or 12.3%, to $1.09 billion at June 30, 2022 from $968.45 million at September 30, 2021.

The increase was primarily due to a $61.52 million increase in commercial real estate loans, a $48.24 million increase in commercial business loans (other than SBA PPP loans), a $24.75 million increase in one- to four-family loans, a $14.62 million increase in construction loans, and smaller increases in other categories.

These increases were partially offset by a $39.60 million decrease in SBA PPP loans, a $6.82 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 decreased by $34.12 million, or 7.3%, to $435.92 million for the nine months ended June 30, 2022 from $470.04 million for the nine months ended June 30, 2021.

The decrease in loan originations was primarily due to a decrease in the amount of SBA PPP and one- to four-family loans originated.

The decrease was partially offset by increases in commercial real estate loans, constructions loans and commercial business (non-PPP) loans originations.

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

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

Sales of fixed-rate one- to four-family mortgage loans decreased by $75.14 million, or 59.5%, to $51.05 million for the nine months ended June 30, 2022 from $126.19 million for the nine months ended June 30, 2021, primarily due to decreased refinance activity for one- to four-family loans, as mortgage refinance activity diminished as market interest rates increased.

Net loans receivable increased by $40.13 million, or 3.5%, to $1.17 billion at December 31, 2022 from $1.13 billion at September 30, 2022.

The increase was primarily due to a $24.17 million increase in one- to four- family loans, a $24.56 million increase in multi-family construction loans, a $5.92 million increase in commercial real estate loans and smaller increases in other categories.

These increases were partially offset by a $8.93 million increase in the undisbursed portion of construction loans in process, and smaller decreases in several other categories.

Loan originations decreased by $74.93 million, or 42.4%, to $101.67 million for the three months ended December 31, 2022 from $176.60 million for the three months ended December 31, 2021.

The decrease in loan originations was primarily due to a decrease in the amount of commercial real estate and one- to four-family loans originated.

The decrease was partially offset by increases in multi-family loan originations.

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

Sales of fixed-rate one- to four-family mortgage loans decreased by $21.4 million, or 94.9%, to $1.16 million for the three months ended December 31, 2022 from $22.56 million for the three months ended December 31, 2021, primarily due to decreased refinance activity for one- to four-family loans due to rising interest rates, declining homes sales and a decision to keep more single family loans originated during the quarter in the portfolio.

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 $213,000, or 1.0%, to $22.15 million at June 30, 2022 from $22.37 million at September 30, 2021.

Premises and equipment decreased by $195,000, or 0.9%, to $21.70 million at December 31, 2022 from $21.90 million at September 30, 2022.

This decrease was primarily due to scheduled depreciation.

OREO (Other Real Estate Owned):

At June 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

At September 30, 2021, OREO and other repossessed assets were $157,000.

At December 31, 2022 and September 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

BOLI (Bank Owned Life Insurance):

BOLI increased by $456,000 or 2.1%, to $22.65 million at June 30, 2022 from $22.19 million at September 30, 2021.

BOLI increased by $156,000 or 0.7%, to $22.96 million at December 31, 2022 from $22.81 million at September 30, 2022.

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

Goodwill and CDI:

The recorded amount of goodwill remained unchanged at $15.13 million at both June 30, 2022 and September 30, 2021.

CDI decreased by $237,000, or 18.8%, to $1.03 million at June 30, 2022 from $1.26 million at September 30, 2021 due to scheduled amortization.

The recorded amount of goodwill remained unchanged at $15.13 million at both December 31, 2022 and September 30, 2022.

CDI decreased by $68,000, or 7.2%, to $880,000 million at December 31, 2022 from $948,000 at September 30, 2022 due to scheduled amortization.

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

Deposits increased by $93.56 million, or 6.0%, to $1.66 billion at June 30, 2022 from $1.57 billion at September 30, 2021.

The increase was primarily due to a $46.56 million increase in money market account balances, a $44.12 million increase in NOW checking account balances, and a $18.90 million increase in savings account balances.

These increases were partially offset by an $8.68 million decrease in certificates of deposit account balances and a $7.34 million decrease in non-interest bearing account balances.

Deposits consisted of the following at June 30, 2022 and September 30, 2021 (dollars in thousands):

June 30, 2022 September 30, 2021

Loan Servicing Rights, Net :

Loan servicing rights, net decreased by $253,000, or 8.4%, to $2.77 million at December 31, 2022 from $3.02 million at September 30, 2022, primarily due to the amortization of servicing rights.

The principal amount of loans serviced for Freddie Mac and the SBA decreased by $12.46 million to $422.75 million at December 31, 2022 from $410.29 million at September 30, 2022.

Deposits decreased by $31.09 million, or 1.9%, to $1.60 billion at December 31, 2022 from $1.63 billion at September 30, 2022.

The decrease was primarily due to a $35.69 million decrease in non-interest bearing account balances, an $18.89 million decrease in money market account balances, a $3.71 million decrease in savings account balances and a $3.04 million decrease in NOW checking account balances.

These decreases were partially offset by a $30.24 million increase in certificates of deposit account balances.

Deposits consisted of the following at December 31, 2022 and September 30, 2022 (dollars in thousands):

December 31, 2022 September 30, 2022

Amount Percent Amount Percent

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NOW checking 434,832 27.2 447,779 27.5

NOW checking - reciprocal 9,910 0.6 — —

Savings 279,514 17.5 283,219 17.4

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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.

There were no FHLB borrowings at June 30, 2022 as compared to one $5.00 million borrowing at September 30, 2021,with a scheduled maturity in March 2025.

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

There were no FHLB borrowings outstanding at December 31, 2022 and September 30, 2022.

Shareholders’ Equity:

Total shareholders’ equity increased by $7.42 million, or 3.6%, to $214.32 million at June 30, 2022 from $206.90 million at September 30, 2021.

The increase was primarily due to net income of $16.55 million for the nine months ended June 30, 2022 and $359,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $5.42 million, the repurchase of 135,791 shares of the Company's common stock for $3.65 million (an average price of $26.89 per share) and a change in the accumulated other comprehensive income (loss) category of $624,000 related to the unrealized holding loss on investment securities available for sale.

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

Total shareholders’ equity increased by $4.98 million, or 2.3%, to $223.55 million at December 31, 2022 from $218.57 million at September 30, 2022.

The increase was primarily due to net income of $7.51 million for the three months ended December 31, 2022 and $397,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $2.64 million, and the repurchase of 10,570 shares of the Company's common stock for $348,000 (an average price of $32.88 per share).

Asset Quality:

The non-performing assets to total assets ratio was 0.13% at June 30, 2022 compared to 0.18% at September 30, 2021.

Total non-performing assets decreased by $765,000, or 24.1%, to $2.41 million at June 30, 2022 from $3.17 million

at September 30, 2021.

The decrease in non-performing assets was due to a $563,000 decrease in non-accrual loans, a $157,000 decrease in OREO and other repossessed assets and a $45,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at June 30, 2022 and September 30, 2021 (dollars in thousands):

The non-performing assets to total assets ratio was 0.12% at December 31, 2022 and September 30, 2022.

Total non-performing assets decreased by $32,000, or 1.5%, to $2.13 million at December 31, 2022 from $2.17 million at September 30, 2022.

The decrease in non-performing assets was due to a $24,000 decrease in non-accrual loans and a $8,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at December 31, 2022 and September 30, 2022 (dollars in thousands):

2022 September 30,

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Non-accrual investment securities 98 106

OREO and other repossessed assets, net (2) — 157

Total non-performing assets (2) $ 2,133 $ 2,165

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___________________________________

(1) As of June 30, 2022, there were no one- to four-family properties 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 June 30, 2022 and September 30, 2021, the balance of OREO did not include any foreclosed residential real estate property.

(1) As of December 31, 2022 and September 30, 2022, there were no one- to four-family properties in the process of foreclosure.

(2) Does not include TDRs on accrual status.

(4) Does not include TDRs totaling $158 and $182 reported as non-accrual loans at June 30, 2022 and September 30, 2021, respectively.

(3) Does not include TDRs totaling $116 and $142 reported as non-accrual loans at December 31, 2022 and September 30, 2022, respectively.

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

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2022 and 2021

Net income decreased by $1.29 million, or 18.3%, to $5.74 million for the quarter ended June 30, 2022 from $7.02 million for the quarter ended June 30, 2021.

Net income per diluted common share decreased by $0.14, or 16.9%, to $0.69 for the quarter ended June 30, 2022 from $0.83 for the quarter ended June 30, 2021.

The decreases in net income and net income per diluted common share for the three months ended June 30, 2022 were primarily due to a $1.16 million decrease in non-interest income and a $1.26 million increase in non-interest expense.

These decreases were partially offset by an $825,000 increase in net interest income and a $314,000 decrease in the provision for income taxes .

Net income decreased by $5.02 million, or 23.3%, to $16.55 million for the nine months ended June 30, 2022 from $21.57 million for the nine months ended June 30, 2021.

Net income per diluted common share decreased by $0.58, or 22.75%, to $1.97 for the nine months ended June 30, 2022 from $2.55 for the nine months ended June 30, 2021.

The decrease in net income and net income per diluted common share for the nine months ended June 30, 2022 were primarily due to a $4.08 million decrease in non-interest income and a $2.90 million increase in non-interest expense.

These decreases were partially offset by an $823,000 increase in net interest income and a $1.14 million decrease in the provision for income taxes .

Comparison of Operating Results for the Three Months Ended December 31, 2022 and 2021

Net income increased by $2.02 million, or 36.9%, to $7.51 million for the quarter ended December 31, 2022 from $5.49 million for the quarter ended December 31, 2021.

Net income per diluted common share increased by $0.25, or 38.5%, to $0.90 for the quarter ended December 31, 2022 from $0.65 for the quarter ended December 31, 2021.

The increases in net income and net income per diluted common share for the three months ended December 31, 2022 were primarily due to a $5.05 million increase in net interest income.

This increase was partially offset by a $1.27 million increase in non-interest expense, a $737,000 decrease in non-interest income, a $525,000 increase in the provision for loans losses and a $492,000 increase in the provision for income taxes .

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

Net Interest Income:

Net interest income increased by $825,000, or 6.3%, to $13.98 million for the quarter ended June 30, 2022 from $13.16 million for the quarter ended June 30, 2021.

The increase in net interest income was primarily due to an increase in the average yield on interest-bearing deposits in banks and CDs, an increase in the average balance of investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning investments during the period, and a decline in average cost of interest-bearing liabilities.

This increase was partially offset by a decrease in deferred SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income increased by $762,000, or 5.5%, to $14.63 million for the quarter ended June 30, 2022 from $13.87 million for the quarter ended June 30, 2021, primarily due to increases in the average balance of investment securities and the average yield on deposits in banks and CDs.

This increase was partially offset by a decrease in the average yield on loans receivable reflecting the decline in deferred SBA PPP loan origination fees recognized between the periods.

Average total interest-earning assets increased by $161.25 million, or 9.9%, to $1.80 billion for the quarter ended June 30, 2022 from $1.64 billion for the quarter ended June 30, 2021.

Average investment securities increased by $147.77 million, or 134.6%, average loans receivable increased by $40.34 million, or 3.9% and partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $26.85 million, or 5.5%, between the periods.

During the quarter ended June 30, 2022, 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 $63,000 compared to $84,000 for the quarter ended June 30, 2021.

Net interest income increased by $5.05 million, or 39.8%, to $17.74 million for the quarter ended December 31, 2022 from $12.70 million for the quarter ended December 31, 2021.

The increase in net interest income was primarily due to an increase in the average yield on interest-bearing deposits in banks and CDs, an increase in the average yield and balance of investment securities and an increase in average balance of loans, as the Company placed a portion of its excess overnight liquidity into higher-earning loans and investments during the period.

This increase was partially offset by an increase in the average cost of interest-bearing liabilities and a decrease in deferred SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income increased by $5.77 million, or 43.2%, to $19.11 million for the quarter ended December 31, 2022 from $13.34 million for the quarter ended December 31, 2021, primarily due to increases in the average yield and balance of investment securities, the average balance of loans receivable and the average yield on interest-bearing deposits in banks and CDs.

These increase were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs.

Average total interest-earning assets increased by $20.43 million, or 1.2%, to $1.76 billion for the quarter ended December 31, 2022 from $1.74 billion for the quarter ended December 31, 2021.

Average investment securities increased by $167.35 million, or 107.3%, average loans receivable increased by $167.01 million, or 16.7% and was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $313.90 million, or 54.1%, between the periods.

During the quarter ended December 31, 2022, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $28,000 compared to $57,000 for the quarter ended December 31, 2021.

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

During the quarter ended June 30, 2022, there was a total of $246,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $443,000 collected for the quarter ended June 30, 2021.

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 3.26% for the quarter ended June 30, 2022 from 3.39% for the quarter ended June 30, 2021.

Also impacting the average yield and average interest-earning asset balances during the current quarter were SBA PPP loans.

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 June 30, 2022, average SBA PPP loans were $2.08 million, and the Company recorded $9,000 in interest income and accreted $146,000 in SBA PPP loan origination fees into income.

For the quarter ended June 30, 2021, average SBA PPP loans were $118.05 million, and the Company recorded $293,000 in interest income and accreted $1.30 million in SBA PPP loan origination fees into income.

At June 30, 2022, SBA PPP deferred loan origination fees of $52,000 remain to be accreted into interest income during the remaining life of the loans.

Total interest expense decreased by $63,000, or 8.9%, to $645,000 for the quarter ended June 30, 2022 from $708,000 for the quarter ended June 30, 2021.

The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased to 0.23% for the quarter ended June 30, 2022 from 0.28% for the quarter ended June 30, 2021.

Average interest-bearing liabilities increased by $117.48 million, or 11.6%, to $1.13 billion for the quarter ended June 30, 2022 from $1.01 billion for the quarter ended June 30, 2021, primarily due to

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

As a result of these changes, the net interest margin ("NIM") decreased to 3.11% for the quarter ended June 30, 2022 from 3.22% for the quarter ended June 30, 2021.

Net interest income increased by $823,000, or 2.1%, to $39.57 million for the nine months ended June 30, 2022 from $38.75 million for the nine months ended June 30, 2021.

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

This increase was partially offset by a significant decrease in SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income increased by $308,000, or 0.7%, to $41.49 million for the nine months ended June 30, 2022 from $41.18 million for the nine months ended June 30, 2021.

The average yield on interest-earning assets decreased to 3.14% for the nine months ended June 30, 2022 from 3.50% for the nine months ended June 30, 2021.

Average total interest-earning assets increased by $194.73 million, or 12.4%, to $1.76 billion for the nine months ended June 30, 2022 from $1.57 billion for the nine months ended June 30, 2021.

Average loans receivable decreased by $2.56 million, or 0.2%, average investment securities increased by $107.81 million or 110.2%, and average interest-bearing deposits in banks and CDs increased by $89.44 million, or 20.9%, between the periods.

Total interest expense decreased by $515,000, or 21.2%, to $1.92 million for the nine months ended June 30, 2022 from $2.43 million for the nine months ended June 30, 2021.

The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased to 0.23% for the nine months ended June 30, 2022 from 0.34% for the nine months ended June 30, 2021.

Average interest-bearing liabilities increased by $125.31 million, or 12.9%, to $1.10 billion for the nine months ended June 30, 2022 from $970.83 million for the nine months ended June 30, 2021, primarily due to increases in the average balances of savings, NOW checking, 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 NIM decreased to 2.99% for the nine months ended June 30, 2022 from 3.30% for the nine months ended June 30, 2021.

During the quarter ended December 31, 2022, there was a total of $120,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $145,000 collected for the quarter ended December 31, 2021.

The average yield on interest-earning assets increased to 4.34% for the quarter ended December 31, 2022 from 3.07% for the quarter ended December 31, 2021.

The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 339 basis points and 170 basis points to 3.59% and 2.74%, respectively, for the quarter ended December 31, 2022 compared to the quarter ended December 31, 2021, while the average yield on loans receivable decreased nine basis points to 4.97% during the same period.

Also impacting the average yield on loans receivable and average interest-earning asset balances during the quarters ended December 31, 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 .

Total interest expense increased by $723,000, or 111.9%, to $1.37 million for the quarter ended December 31, 2022 from $646,000 for the quarter ended December 31, 2021.

The increase in interest expense was due to an increase in the cost of interest-bearing liabilities and to a much lesser extent an increase in the average balance.

The average cost of interest-bearing liabilities increased to 0.50% for the quarter ended December 31, 2022 from 0.24% for the quarter ended December 31, 2021.

Average interest-bearing liabilities increased by $28.54 million, or 2.7%, to $1.09 billion for the quarter ended December 31, 2022 from $1.07 billion for the quarter ended December 31, 2021, primarily due to increases in the average balances of money market accounts, savings accounts, and certificate of deposit accounts that was partially offset by a decline in the average balance of NOW checking accounts.

As a result of these changes, the net interest margin ("NIM") increased to 4.03% for the quarter ended December 31, 2022 from 2.92% for the quarter ended December 31, 2021.

Average Balances, Interest and Average Yields/Cost

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

Three Months Ended June 30,

Three Months Ended December 31,

Balance Interest and

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

Nine Months Ended June 30,

Balance Interest and

Dividends Yield/

Balance Interest and

Dividends Yield/

Interest-earning assets:

Loans receivable (1)(2) $ 1,033,173 $ 37,870 4.89 % $ 1,035,733 $ 39,406 5.07 %

Investment securities (2) 205,667 2,012 1.30 97,857 877 1.19

Dividends from mutual funds, FHLB stock and other investments 6,004 80 1.78 5,964 83 1.86

Interest-bearing deposits in banks and CDs 517,323 1,528 0.39 427,881 816 0.25

Total interest-earning assets 1,762,167 41,490 3.14 1,567,435 41,182 3.50

Non-interest-earning assets 84,426 85,636

Total assets $ 1,846,593 $ 1,653,071

Interest-bearing liabilities:

Savings $ 275,684 171 0.08 $ 237,456 147 0.08

Money market 241,734 530 0.29 181,115 414 0.31

NOW checking 448,028 439 0.13 396,140 467 0.16

Certificates of deposit 128,784 762 0.79 147,530 1,330 1.21

Short-term borrowings 3 — 0.23 1 — 0.30

Long-term borrowings 1,906 17 1.19 8,591 76 1.17

Total interest-bearing liabilities 1,096,139 1,919 0.23 970,833 2,434 0.34

Non-interest-bearing deposits 530,038 476,628

Other liabilities 9,938 10,757

Total liabilities 1,636,115 1,458,218

Shareholders' equity 210,478 194,853

Total liabilities and

shareholders' equity $ 1,846,593 $ 1,653,071

Net interest income $ 39,571 $ 38,748

Interest rate spread 2.91 % 3.16 %

Net interest margin (3) 2.99 % 3.30 %

Ratio of average interest-earning assets to average interest- bearing liabilities 160.76 % 161.45 %

(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.

Rate Volume Analysis

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Three months ended

June 30, 2022

December 31, 2022

compared to three months

ended June 30, 2021

increase (decrease) due to Nine months ended

June 30, 2022

compared to nine months

ended June 30, 2021

ended December 31, 2021

increase (decrease) due to

Rate Volume Net

Change Rate Volume Net

Interest-earning assets:

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Interest-bearing deposits in banks and CDs 2,340 (238) 2,102

Total net increase (decrease) in income on interest-earning assets (261) 1,023 762 (839) 1,147 308

Total net increase in income on interest-earning assets 3,214 2,556 5,770

Interest-bearing liabilities:

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Certificates of deposit 188 6 194

FHLB borrowings (9) (9) (18) (29) (30) (59)

Total net decrease in expense on interest-bearing liabilities (84) 21 (63) (479) (36) (515)

Net increase (decrease) in net interest income $ (177) $ 1,002 $ 825 $ (360) $ 1,183 $ 823

Long-term borrowings (7) (8) (15)

Total net increase in expense on interest-bearing liabilities 709 14 723

Net increase in net interest income $ 2,505 $ 2,542 $ 5,047

Provision for Loan Losses:

There was no provision for loan losses for the quarters ended June 30, 2022 and June 30, 2021.

For the quarter ended June 30, 2022, there were no net charge offs compared to net recoveries of $35,000 for the quarter ended June 30, 2021.

Non-accrual loans decreased by $563,000, or 19.7%, to $2.29 million at June 30, 2022 from $2.85 million at September 30, 2021 and increased by $262,000, or 12.9%, from $2.03 million at June 30, 2021.

Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $507,000, or 16.7%, to $2.53 million at June 30, 2022, from $3.04 million at September 30, 2021 and decreased by $410,000, or 13.9%, from $2.94 million one year ago.

The $1.32 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at June 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.

There was no provision for loans losses for the nine months ended June 30, 2022 and 2021.

For the nine months ended June 30, 2022, there were net charge-offs of $36,000 compared to net recoveries of $55,000 for the nine months ended June 30, 2021.

There was a $525,000 provision for loan losses for the quarter ended December 31, 2022, primarily due to the increase in loans receivable during the period.

There was no provision for loan losses for the quarter ended December 31, 2021.

For the quarter ended December 31, 2022, there were net recoveries of $1,000 compared to net charge-offs of $1,000 for the quarter ended December 31, 2021.

Non-accrual loans decreased by $24,000, or 1.2%, to $2.04 million at December 31, 2022 from $2.06 million at September 30, 2022 and decreased by $818,000, or 28.7%, from $2.85 million at December 31, 2021.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $157,000, or 7.5%, to $2.25 million at December 31, 2022, from $2.10 million at September 30, 2022 and decreased by $983,000, or 30.4%, from $3.24 million one year ago.

The $631,000 balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at December 31, 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.

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

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

Impaired loans are subjected to an impairment analysis to determine an

appropriate reserve amount to be allocated to each loan.

The aggregate principal impairment reserve amount determined at June 30, 2022 was $127,000 compared to $247,000 at September 30, 2021 and $171,000 at June 30, 2021.

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 September 30, 2022 and December 31, 2022 was $127,000 and was $254,000 at December 31, 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 loan's contractual amounts, of which a portion reflects a discount for possible credit losses.

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

The remaining fair value discount on loans acquired in the South Sound Acquisition was $295,000 at June 30, 2022.

The remaining fair value discount on loans acquired in the South Sound Acquisition was $239,000 at December 31, 2022.

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 $13.43 million at June 30, 2022 (1.22% of loans receivable and 586.3% 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 $13.47 million (1.33% of loans receivable and 663.8% of non-performing loans) at June 30, 2021.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $14.23 million at December 31, 2022 (1.20% of loans receivable and 699.2% 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 $13.70 million (1.20% of loans receivable and 665.5% of non-performing loans) at September 30, 2022 and $13.47 million (1.34% of loans receivable and 472.1% of non-performing loans) at December 31, 2021.

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.

A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, among 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 $1.16 million, or 27.3%, to $3.10 million for the quarter ended June 30, 2022 from $4.27 million for the quarter ended June 30, 2021.

This decrease was primarily due to a $1.35 million decrease in net gain on sales of loans, a $179,000 decrease in the net valuation allowance on loan servicing rights and smaller decreases in several other categories.

Total non-interest income decreased by $737,000, or 21.4%, to $2.71 million for the quarter ended December 31, 2022 from $3.44 million for the quarter ended December 31, 2021.

This decrease was primarily due to a $642,000 decrease in net gain on sales of loans, a $119,000 decrease in the net valuation recovery on loan servicing rights and smaller decreases in several other categories.

These decreases to non-interest income were partially offset by a $34,000 increase in service charges on deposits 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 reflecting reduced refinance activity and a decrease in the average pricing margin compared to the same period last year.

Total non-interest income for the nine months ended June 30, 2022 decreased by $4.08 million, or 29.8%, to $9.63 million from $13.71 million for the nine months ended June 30, 2021.

This decrease was primarily due to a $4.03 million decrease in net gain on sales of loans, and smaller decreases in several other categories.

These decreases were partially offset by a $113,000 increase in ATM and debit card interchange transaction fees, a $96,000 increase in the net valuation recovery on loan servicing rights and smaller increases in several other categories.

Gain on sale of loans was also impacted by rising interest rates, declining homes sales and a decision to retain a higher percentage of single family loans originated during the quarter in the portfolio rather than selling them.

Non-interest Expense:

Total non-interest expense increased by $1.26 million, or 14.6%, to $9.87 million for the quarter ended June 30, 2022 from $8.61 million for the quarter ended June 30, 2021.

This increase was primarily due to a $689,000 increase in salaries and employee benefits, a $318,000 increase in professional fees 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 professional fees was primarily due to higher legal and consulting fees.

The efficiency ratio for the current quarter increased to 57.80% from 49.43% for the comparable quarter one year ago.

Total non-interest expense increased by $2.90 million, or 11.3% to $28.47 million for the nine months ended June 30, 2022 from $25.57 million for the nine months ended June 30, 2021.

This increase was primarily due to $1.66 million increase in salaries and employee benefits expense, a $498,000 increase in professional fess, a $454,000 increase in the other non-interest expense and smaller increases and decreases in several other categories.

Total non-interest expense increased by $1.27 million, or 13.7%, to $10.54 million for the quarter ended December 31, 2022 from $9.26 million for the quarter ended December 31, 2021.

This increase was primarily due to a $729,000 increase in salaries and employee benefits, a $176,000 increase in data processing and telecommunication expense, a $158,000 increase in professional fees 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, 2022) and the hiring of additional lending personnel.

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

The increase in the other non-interest expense 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 and the increase in professional fees was primarily due to higher legal and consulting fees.

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

The efficiency ratio for the current quarter improved to 51.52% from 57.40% for the comparable quarter one year ago.

Provision for Income Taxes:

The provision for income taxes decreased by $314,000, or 17.6%, to $1.47 million for the quarter ended June 30, 2022 from $1.79 million for the quarter ended June 30, 2021.

The provision for income taxes decreased by $1.14 million, or 21.5% to $4.18 million for the nine months ended June 30, 2022 from $5.32 million for the nine months ended June 30, 2021.

These decreases in the provision for income taxes were primarily due to lower income before income taxes.

The Company's effective income tax rate was 20.42% for the quarter ended June 30, 2022 and 20.27% for the quarter ended June 30, 2021.

The Company's effective tax rate was 20.15% for the nine months ended June 30, 2022 and 19.79% for the nine months ended June 30, 2021.

The provision for income taxes increased by $492,000, or 35.4%, to $1.88 million for the quarter ended December 31, 2022 from $1.39 million for the quarter ended December 31, 2021.

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 20.0% for the quarter ended December 31, 2022 and 20.2% for the quarter ended December 31, 2021.

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).

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

At June 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 37.28%.

At June 30, 2022, 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 no amounts were outstanding.

The Bank had $474.66 million available for borrowings with the FHLB at June 30, 2022.

December 31, 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 26.22%.

At December 31, 2022, 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 no amounts were outstanding.

The Bank had $513.48 million available for borrowings with the FHLB at December 31, 2022.

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

At June 30, 2022, the Bank had no outstanding balance on this borrowing line, under which $87.72 million was available for future borrowings.

At December 31, 2022, the Bank had no outstanding balance on this borrowing line, under which $84.89 million was available for future borrowings.

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

At June 30, 2022, the Bank did not have an outstanding balance on this borrowing line.

At December 31, 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.

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

During the nine months ended June 30, 2022 and 2021, the Bank originated $435.92 million and $470.04 million of loans, respectively.

At June 30, 2022, the Bank had loan commitments totaling $178.55 million and undisbursed construction loans in process totaling $102.04 million.

Investment securities purchased during the nine months ended June 30, 2022 and 2021 totaled $167.60 million and $52.50 million, respectively.

During the three months ended December 31, 2022 and 2021, the Bank originated $101.67 million and $176.60 million of loans, respectively.

At December 31, 2022, the Bank had loan commitments totaling $148.06 million and undisbursed construction loans in process totaling $112.10 million.

Investment securities purchased during the three months ended December 31, 2022 and 2021 totaled $31.31 million and $48.49 million, respectively.

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

During the nine months ended June 30, 2022 and 2021, the Bank sold $51.05 million and $126.19 million, respectively, in loans and loan participation interests.

During the three and nine months ended June 30, 2022, the Bank received $64.02 million and $249.16 million in principal repayments, respectively.

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

During the nine months ended June 30, 2022, deposits increased by $93.56 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 $719.38 million at June 30, 2022 from $740.96 million at September 30, 2021.

CDs that are scheduled to mature in less than one year from June 30, 2022 totaled $78.65 million.

During the three months ended December 31, 2022 and 2021, the Bank sold $1.16 million and $22.56 million, respectively, in loans and loan participation interests.

During the three months ended December 31, 2022 and 2021, the Bank received $50.71 million and $113.41 million in principal repayments, respectively.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities decreased to $583.55 million at December 31, 2022 from $648.51 million at September 30, 2022.

CDs that are scheduled to mature in less than one year from December 31, 2022 totaled $108.05 million.

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

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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 three months ending September 30, 2022 that would materially impact liquidity.

Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the remaining nine months ending September 30, 2023 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.

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Assuming continued payment during fiscal year 2023 at the rate of $0.23 per share, the average total dividend paid each quarter would be approximately $1.90 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the remaining three months ending September 30, 2022, the Bank projects that fixed commitments will include $80,000 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 June 30, 2022, there were other future obligations and accrued expenses of $7.23 million.

For the remaining nine months ending September 30, 2023, the Bank projects that fixed commitments will include $233,000 of operating lease payments.

There are no scheduled payments and maturities of FHLB borrowings during the fiscal year 2023.

In addition, at December 31, 2022, there were other future obligations and accrued expenses of $8.90 million.

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

1 unchanged sentence

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

At June 30, 2022, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $2.37 million.

At December 31, 2022, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $2.56 million.

Capital Resources

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

Based on its capital levels at June 30, 2022, the Bank exceeded all regulatory capital requirements as of that date.

Based on its capital levels at December 31, 2022, the Bank exceeded all regulatory capital requirements as of that date.

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

Based on capital levels at June 30, 2022, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Based on capital levels at December 31, 2022, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

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

The following table compares the Bank’s actual capital amounts at June 30, 2022 to its minimum regulatory capital requirements at that date (dollars in thousands):

The following table compares the Bank’s actual capital amounts at December 31, 2022 to its minimum regulatory capital requirements at that date (dollars in thousands):

Be “Adequately

8 unchanged sentences

Total capital 221,154 19.06 92,815 8.00 116,019 10.00

minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions.

At June 30, 2022, the Bank's CET1 capital exceeded the required capital conservation buffer.

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, 2022, the Bank's CET1 capital exceeded the required capital conservation buffer.

Timberland Bancorp, Inc.

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If Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2022, Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2022, Timberland Bancorp, Inc.

would have exceeded all regulatory requirements.

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

as of June 30, 2022 (dollars in thousands):

as of December 31, 2022 (dollars in thousands):

Leverage Capital Ratio:

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Key Financial Ratios and Data

Three Months Ended June 30, Nine Months Ended

2022 2021 2022 2021

Three Months Ended December 31,

PERFORMANCE RATIOS :

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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.

There were no material changes in information concerning market risk from the information provided in the Company’s 2022 Form 10-K.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis