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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-08 · 213 added, 127 removed, 261 unchanged (57% 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 months ended December 31, 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 and six months ended March 31, 2023.

Special Note Regarding Forward-Looking Statements

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

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

impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

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;

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;

our ability to attract and retain deposits;

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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.

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 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.

At March 31, 2023, the Company had total assets of $1.79 billion, net loans receivable of $1.21 billion, total deposits of $1.55 billion and total shareholders’ equity of $227.66 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.

Since March 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 475 basis points, including 175 basis points during the first six months of fiscal 2023, to a range of 4.75% to 5.00% as of March 31, 2023.

As it seeks to control inflation without creating a recession, the FOMC has indicated further increases may be implemented 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 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.

The Company recorded a provision for loan losses of $475,000 and $1.0 million for the three and six months ended March 31, 2023, respectively, primarily due to loan portfolio growth.

There was no provision for loan losses for the three and six months ended March 31, 2022.

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

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.

For the three and six months ended March 31, 2023, 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 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, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.

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

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

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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.

Critical Accounting Policies and Estimates

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

Critical accounting policies and estimates are discussed in the Company’s 2022 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements.

Actual results may differ from these estimates under different assumptions or conditions.

The Company's critical accounting estimates are described in the Company’s 2022 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change.

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

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.

Comparison of Financial Condition at March 31, 2023 and September 30, 2022

The Company’s total assets decreased by $73.89 million, or 4.0%, to $1.79 billion at March 31, 2023 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.

Net loans receivable increased by $77.77 million, or 6.9%, to $1.21 billion at March 31, 2023 from $1.13 billion at September 30, 2022, primarily due to increases in one- to four-family, multi-family construction, commercial real estate, and multi-family loans, as well as smaller increases in several other loan categories.

These increases to net loans receivable were partially offset by smaller decreases in several other loan categories.

Total deposits decreased by $83.41 million, or 5.1%, to $1.55 billion at March 31, 2023 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.

Shareholders’ equity increased by $9.09 million, or 4.2%, to $227.66 million at March 31, 2023 from $218.57 million at September 30, 2022.

The increase in shareholders' equity was primarily 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 $91.36 million, or 26.9%, to $248.29 million at December 31, 2022 from $339.65 million at September 30, 2022.

Cash and cash equivalents and CDs held for investment decreased by $177.00 million, or 52.1%, to $162.65 million at March 31, 2023 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 $26.41 million, or 8.6%, to $335.26 million at December 31, 2022 from $308.86 million at September 30, 2022.

Investment securities (including investments in equity securities) increased by $24.74 million, or 8.0%, to $333.60 million at March 31, 2023 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.

government agency securities and mortgage-backed investment securities during the six months ended March 31, 2023, 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 was $2.19 million at December 31, 2022 and September 30, 2022.

FHLB stock increased $8,000, or 0.4% to $2.20 million at March 31, 2023 from $2.19 million at September 30, 2022, due to purchases required by the FHLB due to the increase in total assets from their annual assessment date.

Other Investments:

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both December 31, 2022 and September 30, 2022.

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 March 31, 2023 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 $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.

Net loans receivable increased by $77.77 million, or 6.9%, to $1.21 billion at March 31, 2023 from $1.13 billion at September 30, 2022.

The increase was primarily due to increases of $40.52 million in one- to four- family loans, $18.57 million in multi-family construction loans, $11.23 million in commercial real estate loans, $8.85 million in multi-family loans, $3.84 million in commercial business loans and smaller increases in other categories.

These increases were partially offset by smaller decreases in several other categories.

Loan originations decreased by $128.20 million, or 41.8%, to $178.81 million for the six months ended March 31, 2023 from $307.01 million for the six months ended March 31, 2022.

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

Sales of fixed-rate one- to four-family mortgage loans decreased by $35.89 million, or 91.0%, to $3.55 million for the six months ended March 31, 2023 from $39.44 million for the six months ended March 31, 2022, 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 $195,000, or 0.9%, to $21.70 million at December 31, 2022 from $21.90 million at September 30, 2022.

Premises and equipment decreased by $154,000, or 0.7%, to $21.74 million at March 31, 2023 from $21.90 million at September 30, 2022.

This decrease was primarily due to scheduled depreciation.

OREO (Other Real Estate Owned):

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

At March 31, 2023 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 $156,000 or 0.7%, to $22.96 million at December 31, 2022 from $22.81 million at September 30, 2022.

BOLI increased by $313,000 or 1.4%, to $23.12 million at March 31, 2023 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 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.

The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2023 and September 30, 2022.

CDI decreased by $135,000, or 14.2%, to $813,000 million at March 31, 2023 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.”

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.

Loan servicing rights, net decreased by $488,000 or 16.1%, to $2.54 million at March 31, 2023 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 $13.41 million to $396.88 million at March 31, 2023 from $410.29 million at September 30, 2022.

Deposits decreased by $83.41 million, or 5.1%, to $1.55 billion at March 31, 2023 from $1.63 billion at September 30, 2022.

The decrease was primarily due to a $50.78 million decrease in non-interest bearing account balances, a $44.32 million decrease in NOW checking account balances, a $38.15 million decrease in money market account balances, and a $13.70 million decrease in savings account balances.

These decreases were partially offset by a $63.53 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

The net decrease in deposits was primarily due to competitive pricing pressure and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances.

Deposits consisted of the following at March 31, 2023 and September 30, 2022 (dollars in thousands):

March 31, 2023 September 30, 2022

Amount Percent Amount Percent

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The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral.

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

There were no FHLB borrowings outstanding at March 31, 2023 and September 30, 2022.

Shareholders’ Equity:

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).

Total shareholders’ equity increased by $9.09 million, or 4.2%, to $227.66 million at March 31, 2023 from $218.57 million at September 30, 2022.

The increase was primarily due to net income of $14.17 million for the six months ended March 31, 2023 and $517,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $4.53 million, and the repurchase of 44,833 shares of the Company's common stock for $1.45 million (an average price of $32.23 per share).

Asset Quality:

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.

Non-performing assets to total assets was 0.12% at March 31, 2023 and September 30, 2022.

Total non-performing assets decreased by $103,000, or 4.8%, to $2.06 million at March 31, 2023 from $2.17 million at September 30, 2022.

The decrease in non-performing assets was due to a $90,000 decrease in non-accrual loans and a $13,000 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):

The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2023 and September 30, 2022 (dollars in thousands):

2023 September 30,

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

(1) As of March 31, 2023 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.

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

(3) Does not include TDRs totaling $50 and $142 reported as non-accrual loans at March 31, 2023 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 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.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2023 and 2022

Net income increased by $1.34 million, or 25.1%, to $6.66 million for the quarter ended March 31, 2023 from $5.33 million for the quarter ended March 31, 2022.

Net income per diluted common share increased by $0.17, or 27.0%, to $0.80 for the quarter ended March 31, 2023 from $0.63 for the quarter ended March 31, 2022.

The increases in net income and net income per diluted common share for the three months ended March 31, 2023 were primarily due to a $4.26 million increase in net interest income.

This increase was partially offset by a $1.61 million increase in non-interest expense, a $447,000 decrease in non-interest income, a $475,000 increase in the provision for loans losses and a $389,000 increase in the provision for income taxes.

Net income increased by $3.36 million, or 31.1%, to $14.17 million for the six months ended March 31, 2023 from $10.81 million for the six months ended March 31, 2022.

Net income per diluted common share increased by $0.42, or 32.8%, to $1.70 for six months ended March 31, 2023 from $1.28 for the six months ended March 31, 2022.

The increase in net income and net income per diluted common share was due to a $9.31 million increase in net interest income.

This increase was partially offset by a $2.88 million increase in non-interest expense, a $1.18 million decrease in non-interest income.

a $1.00 million increase in the provision for loan losses and a $882,000 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 $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.

Net interest income increased by $4.26 million, or 33.0%, to $17.15 million for the quarter ended March 31, 2023 from $12.89 million for the quarter ended March 31, 2022.

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 average 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.

Total interest and dividend income increased by $5.87 million, or 43.4%, to $19.39 million for the quarter ended March 31, 2023 from $13.52 million for the quarter ended March 31, 2022, 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 increases were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs.

The average balance of total interest-earning assets decreased by $30.72 million, or 1.8%, to $1.72 billion for the quarter ended March 31, 2023 from $1.75 billion for the quarter ended March 31, 2022.

The average balance of investment securities increased by $130.29 million, or 63.9%, the average balance of loans receivable increased by $171.29 million, or 16.6% and was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $332.46 million, or 65.2%, between the periods.

During the quarter ended March 31, 2023, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $15,000 compared to $34,000 for the quarter ended March 31, 2022.

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

During the quarter ended December 31, 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.

During the quarter ended March 31, 2023, there was a total of $99,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $246,000 collected for the quarter ended March 31, 2022.

The average yield on interest-earning assets increased by 142 basis points to 4.51% for the quarter ended March 31, 2023 from 3.09% for the quarter ended March 31, 2022.

The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 408 basis points and 178 basis points to 4.30% and 2.94%, respectively, for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, while the average yield on loans receivable increased eight basis points to 4.98% during the same period.

Also impacting the average yield on loans receivable and average interest-earning asset balances during the quarters ended March 31, 2023 and 2022 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.

Total interest expense increased by $1.61 million, or 256.6%, to $2.24 million for the quarter ended March 31, 2023 from $627,000 for the quarter ended March 31, 2022.

The increase in interest expense was due to an increase in the cost of interest-bearing liabilities.

The average cost of interest-bearing liabilities increased to 0.84% for the quarter ended March 31, 2023 from 0.23% for the quarter ended March 31, 2022.

The average balance of interest-bearing liabilities decreased by $15.87 million, or 1.5%, to $1.08 billion for the quarter ended March 31, 2023 from $1.09 billion for the quarter ended March 31, 2022, primarily due to decreases in the average balances of NOW checking, money market, and savings accounts, partially offset by an increase in the average balance of certificate of deposit accounts.

As a result of the increase in net interest income and the decrease in average balance of interest earning assets, net interest margin ("NIM") increased to 3.99% for the quarter ended March 31, 2023 from 2.95% for the quarter ended March 31, 2022.

Net interest income increased $9.31 million to $34.89 million for the six months ended March 31, 2023 from $25.59 million for the six months ended March 31, 2022.

The increase in net interest income was primarily due to an $11.64 million increase in total interest and dividend income that was partially offset by a $2.33 million increase in total interest expense.

Total interest and dividend income increased by $11.64 million, or 43.3%, to $38.50 million for the six months ended March 31, 2023 from $26.86 million for the six months ended March 31, 2022, due to increases in the average yield on interest earning assets and the average balances on loans receivable and investment securities.

The average yield on interest-earning assets increased to 4.43% for the six months ended March 31, 2023 from 3.08% for the six months ended March 31, 2022.

The average balance of loans receivable increased $169.13 million, or 16.7%, and the average balance of investment securities increased $147.0 million, or 81.8%.

These increases were offset by a $323.08 million, or 59.2%, decrease in the average balance of interest-bearing deposits in banks and CDs between the periods, resulting in a $6.85 million decrease in the average balance of total interest-earning assets to $1.74 billion for the six months ended March 31, 2022.

Total interest expense increased by $2.33 million, or 183.1% to $3.61 million for the six months ended March 31, 2023 from $1.27 million for the six months ended March 31, 2022.

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

The average cost of interest-bearing liabilities increased to 0.67% for the six months ended March 31, 2023 from 0.24% for the six months ended March 31, 2022.

The average balance of interest bearing liabilities increased by $6.58 million, or 0.61%, to $1.09 billion for the six months ended March 31, 2023 from $1.08 billion for the six months ended March 31, 2022, primarily due to increases in the average balances of certificates of deposit accounts, partially offset by decreases in the average balances of NOW checking and money market accounts.

As a result of the increase in net interest income, NIM increased to 4.02% for the six months ended March 31, 2023 from 2.93% for the six months ended March 31, 2022.

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 December 31,

Three Months Ended March 31,

Balance Interest and

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Certificates of deposit 170,547 932 2.22 128,588 254 0.80

Short-term borrowings 6 — 5.43 10 — 0.20

Long-term borrowings — — — 667 2 1.21

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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.

Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans 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.

Six Months Ended March 31,

Balance Interest and

Dividends Yield/

Balance Interest and

Dividends Yield/

Interest-earning assets:

Loans receivable (1)(2) $ 1,182,420 $ 29,407 4.97 % $ 1,013,293 $ 25,242 4.98 %

Investment securities (2) 326,783 4,674 2.86 179,744 996 1.11

Dividends from mutual funds, FHLB stock and other investments 6,032 115 3.81 5,966 54 1.81

Interest-bearing deposits in banks and CDs 222,569 4,304 3.87 545,651 571 0.21

Total interest-earning assets 1,737,804 38,500 4.43 1,744,654 26,863 3.08

Non-interest-earning assets 86,171 83,908

Total assets $ 1,823,975 $ 1,828,562

Interest-bearing liabilities:

Savings $ 277,382 178 0.13 $ 271,197 112 0.08

Money market 229,185 688 0.60 233,480 338 0.29

NOW checking 426,345 1,340 0.63 440,999 278 0.13

Certificates of deposit 152,814 1,400 1.84 130,611 529 0.81

Short-term borrowings 3 — 5.43 5 — 0.17

Long-term borrowings — — — 2,857 17 1.19

Total interest-bearing liabilities 1,085,729 3,606 0.67 1,079,149 1,274 0.24

Non-interest-bearing deposits 505,949 530,171

Other liabilities 9,813 9,824

Total liabilities 1,601,491 1,619,144

Shareholders' equity 222,484 209,418

Total liabilities and

shareholders' equity $ 1,823,975 $ 1,828,562

Net interest income $ 34,894 $ 25,589

Interest rate spread 3.76 % 2.84 %

Net interest margin (3) 4.02 % 2.93 %

Ratio of average interest-earning assets to average interest- bearing liabilities 160.06 % 161.67 %

_______________

(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 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

The following table sets forth the effects of changing rates and volumes on the net interest income of the Company.

Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns).

volume), and (iii) the net change (sum of the prior columns).

Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).

Three months ended

December 31, 2022

March 31, 2023

compared to three months

ended December 31, 2021

ended March 31, 2022

increase (decrease) due to Six months ended

March 31, 2023

compared to six months

ended March 31, 2022

increase (decrease) due to

Rate Volume Net

Change Rate Volume Net

Interest-earning assets:

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Provision for Loan Losses:

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.

There was a $475,000 provision for loan losses for the quarter ended March 31, 2023, primarily due to the increase in loans receivable during the period.

There was no provision for loan losses for the quarter ended March 31, 2022.

For the quarter ended March 31, 2023, there were net charge-offs of $6,000 compared to net charge-offs of $35,000 for the quarter ended March 31, 2022.

Non-accrual loans decreased by $90,000, or 4.4%, to $1.97 million at March 31, 2023 from $2.06 million at September 30, 2022 and decreased by $682,000, or 25.7%, from $2.65 million at March 31, 2022.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $95,000, or 4.5%, to $2.19 million at March 31, 2023, from $2.10 million at September 30, 2022 and decreased by $750,000, or 25.5%, from $2.94 million one year ago.

The $572,000 balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at March 31, 2023, 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 a $1.00 million provision for loan losses for the six months ended March 31, 2023, primarily due to the increase in loans receivable during the period.

There was no provision for loan losses made for the six months ended March 31, 2022.

For the six months ended March 31, 2023, there were net charge-offs of $5,000 compared to net charge offs of $36,000 for the six months ended March 31, 2022.

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

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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.

The aggregate principal impairment reserve amount determined at March 31, 2023 was $123,000 and $127,000 at September 30, 2022 and March 31, 2022.

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 $239,000 at December 31, 2022.

The remaining fair value discount associated with $13.92 million in loans that were acquired in the South Sound Acquisition was $225,000 at March 31, 2023.

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 $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.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $14.70 million at March 31, 2023 (1.20% of loans receivable and 746.5% 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 $13.43 million (1.28% of loans receivable and 506.7% of non-performing loans) at March 31, 2022.

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

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Non-interest Income:

Total non-interest income decreased by $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.

Total non-interest income decreased by $447,000, or 14.5%, to $2.64 million for the quarter ended March 31, 2023 from $3.08 million for the quarter ended March 31, 2022.

This decrease was primarily due to a $370,000 decrease in net gain on sales of loans, a $121,000 decrease in service charges on deposits and smaller decreases in several other categories.

These decreases to non-interest income were partially offset by a $28,000 increase in ATM and debit card interchange transaction fees and smaller increases in several other categories.

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

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.

Total non-interest income for the six months ended decreased by $1.18 million, or 18.1%, to $5.34 from $6.53 million for the six months ended March 31, 2022.

This decrease was primarily due to a $1.01 million decrease in gain on sales of loans, a $119,000 decrease in the valuation recovery on loan servicing rights, an $87,000 decrease in service charges on deposits, and smaller decreases in several other categories.

Non-interest Expense:

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.

Total non-interest expense increased by $1.61 million, or 17.3%, to $10.94 million for the quarter ended March 31, 2023 from $9.33 million for the quarter ended March 31, 2022.

This increase was primarily due to an $854,000 increase in salaries and employee benefits, a $211,000 increase in data processing and telecommunication expense, a $151,000 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.

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The efficiency ratio for the current quarter improved to 55.31% from 58.42% for the comparable quarter one year ago.

Total non-interest expense increased by $2.88 million, or 15.5%, to $21.48 million for the six months ended March 31, 2023 from $18.60 million for the six months ended March 31, 2022.

This increase was primarily due to a $1.58 million increase in salaries and employee benefits, a $386,000 increase in data processing and telecommunication expense, a $309,000 increase in professional fees and smaller increases in several other categories, which were partially offset by smaller decreases in several categories.

Provision for Income Taxes:

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 provision for income taxes increased by $389,000, or 29.6%, to $1.71 million for the quarter ended March 31, 2023 from $1.32 million for the quarter ended March 31, 2022.

The provision for income taxes increased by $882,000, or 32.6%, to $3.59 million for the six months ended March 31, 2023 from $2.71 million for the six

months ended March 31, 2022.

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

The Company's effective income tax rate was 20.4% for the quarter ended March 31, 2023 and 19.8% for the quarter ended March 31, 2022.

The Company's effective tax rate was 20.2% for the six months ended March 31, 2023 from 20.01% for the six months ended March 31, 2022.

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.

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

At March 31, 2023, 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 16.96%.

At March 31, 2023, 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 $509.57 million available for borrowings with the FHLB at March 31, 2023.

The Bank maintains two short-term borrowing lines with the FRB with total credit based on eligible collateral;

Borrower-in-Custody ("BIC") and Bank Term Funding Program ("BTFP").

At March 31, 2023, the Bank had no outstanding balance on the BIC line, under which $82.32 million was available for future borrowings.

At March 31, 2023, the Bank had no outstanding balance on the BTFP line, under which $55.07 million was available for future borrowings.

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

At December 31, 2022, the Bank did not have an outstanding balance on this borrowing line.

At March 31, 2023, 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 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.

During the six months ended March 31, 2023 and 2022, the Bank originated $178.81 million and $307.01 million of loans, respectively.

At March 31, 2023, the Bank had loan commitments totaling $180.03 million and undisbursed construction loans in process totaling $99.25 million.

Investment securities purchased during the six months ended March 31, 2023 and 2022 totaled $32.60 million and $126.27 million, respectively.

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

During the three months ended December 31, 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.

During the six months ended March 31, 2023 and 2022, the Bank sold $3.55 million and $39.44 million, respectively, in loans and loan participation interests.

During the three and six months ended March 31, 2023, the Bank received $49.27 million and $99.98 million in principal repayments, respectively.

During the three and six months ended March 31, 2022, the Bank received $71.72 million and $179.94 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 available for sale decreased to $218.34 million at March 31, 2023 from $381.90 million at September 30, 2022.

CDs that are scheduled to mature in less than one year from March 31, 2023 totaled $146.45 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 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.

The current quarterly common stock dividend rate is $0.23 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders.

Assuming continued payment during fiscal year 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 nine months ending September 30, 2023, the Bank projects that fixed commitments will include $233,000 of operating lease payments.

Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the remaining six months ending September 30, 2023 that would materially impact liquidity.

For the remaining six months ending September 30, 2023, the Bank projects that fixed commitments will include $155,000 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.

In addition, at March 31, 2023, there were other future obligations and accrued expenses of $8.26 million.

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

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

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

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

In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases.

Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends.

At March 31, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.70 million.

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 $1.89 million based on the number of current outstanding shares at March 31, 2023 (which assumes no increases or decrease in the number of shares).

From time to time, our Board of Directors has authorized stock repurchase plans.

In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

In February 2021, the Company’s board of directors announced a plan to repurchase 415,970 shares of the Company's common stock.

The repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares.

The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

The repurchase program does not obligate the Company to purchase any particular number of shares.

For additional information on the Company’s stock repurchases, see “Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.

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 December 31, 2022, the Bank exceeded all regulatory capital requirements as of that date.

Based on its capital levels at March 31, 2023, the Bank exceeded all regulatory capital requirements as of that date.

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

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

Based on capital levels at March 31, 2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

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

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

The following table compares the Bank’s actual capital amounts at March 31, 2023 to its minimum regulatory capital requirements at that date (dollars in thousands):

Be “Adequately

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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.

At March 31, 2023, 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 December 31, 2022, Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2023, Timberland Bancorp, Inc.

would have exceeded all regulatory requirements.

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

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

as of March 31, 2023 (dollars in thousands):

Leverage Capital Ratio:

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Key Financial Ratios and Data

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended

2023 2022 2023 2022

PERFORMANCE RATIOS :

6 unchanged sentences

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